Volume 46 Number 181,
April-June 2015

The Economics of Public-Private Partnerships. A Basic Guide. Anthology, Eduardo Engel, Ronald Fischer and Alexander Galetovic. Collection of Readings: 105, El Trimestre Económico, Fondo de Cultura Económica, Mexico, 2014.

Public-private partnerships (PPP) are becoming increasingly common in public administrations. However, there are many erroneous ideas regarding their meaning and implications. This book clarifies these concepts, explaining lessons learned by the authors in recent years, both in conducting academic research as well as in their professional practice of advising various governmental administrations.

The book begins by offering a precise definition of PPPs and the types of projects under debate. A PPP is a contract by which a government awards a private entity the financing, construction, operation and maintenance of a public infrastructure project. Once a certain amount of time has passed, the work will shift to the hands of the government, which will from that point forward be in charge of its maintenance and operation. The works mentioned in the book mainly include bridges, roads, schools, hospitals and ports.

The book goes on to explain that PPPs are an intermediate choice between the fully public or private provision of services. In principle, infrastructure works and services provided by these partnerships could be offered under either of these other two schemes. In public provision, a governmental body contracts a private company to build the project and finances it with taxes or debt. A governmental agency will later be in charge of operation and maintenance for the work, but it may subcontract other private companies to do so on its behalf or engage its own staff. Under this scheme, users can pay for the cost of the service directly through fares or the cost can be assumed by taxpayers. By contrast, under private provision, a private entity is charged with financing, building and maintaining the project. Once the work provides the service, this private entity can charge a fee to users to recover its costs, as well as take care of operations and maintenance.

Because the book aims to serve as a guide for decision-makers, the authors try to explain the advantages and disadvantages of PPPs as compared to public or private provision, steering clear of the ideological biases that usually cloud these discussions. To do so, they provide a broad overview of theoretical and empirical academic works as well as various experiences in other countries with different degrees of development. Put simply, this book has two main objectives: 1) Classify the projects and conditions of development in countries for which public provision, PPPs or private provision is best, respectively; 2) Offer recommendations on how to draft contracts between the government and companies taking part in the PPP, as well as how to deal with PPPs in public finances.

Following the introduction, the authors review the experiences of many countries with PPPs. The Latin American countries mentioned include: Argentina, Chile, Colombia and Mexico. Here, the authors critically evaluate the specific PPPs of each country, mainly emphasizing the problems that each PPP faced during implementation.

The next chapter is focused on PPPs for highway and road projects. Because of the features of highways and roads, the authors believe that this type of project is best suited to PPPs. They explain the disadvantages of purely private or public provision of highways. For example, they assert that highways are natural monopolies, which is why they generate incentives for a private agent to charge high prices to use them. Due to the nature of highways, we cannot expect competition to flourish in this sector. In addition, they ascertain that governments have few advantages in maintaining assets that deteriorate slowly, such as highways. It is more politically profitable to build a new work or perform some obvious repair than to provide maintenance to a work to prevent its deterioration.

The book also includes a chapter on private financing of PPPs. The authors note that the interest rate that PPPs pay is usually above the rate that governments pay on their debts. However, the authors explain that this difference is justified, because of the risk premium that investors assume, among other factors. Public indebtedness does not include this premium because the risks of the project are transferred to the taxpayers. In any case, the authors maintain that financing is not an important factor when deciding between a PPP and other alternatives.

The next chapter emphasizes the importance of proper accounting for PPPs in public finances. One mistaken argument to resort to PPPs is that they free up resources in the governmental budget. In light of how novel PPPs still are, there are gaps in how to classify assets and outlays related to PPPs in the public sector. Some governments have taken advantage of this situation to spend above budgetary limits or take on debt without acknowledging it. In that sense, the authors state that PPPs are fiscally not very different from public provision and, therefore, should be included in the public sector balance sheet.

The following two chapters are related to renegotiations and governance of PPPs. Because PPPs are long-term contracts, it is desirable and understandable that there are renegotiations. However, the authors signal that they are very frequent in practice and can even arise very soon after the contracts are signed. With that said, they include some proposals to remedy this type of problem in the chapter on PPP governance.

The final chapter provides conclusions. PPPs are suitable in countries with minimal economic and institutional development when the quality of the service can be measured and monitored relatively easily and privatization is not desirable or politically viable. As such, the authors recommend implementing this scheme for port or highway projects, but not for hospitals or schools.

Besides offering recommendations, the book introduces a rigorous and comprehensive analysis of the incentives facing economic agents, whether corporate or political, to provide high-quality and low-cost public services. Consequently, this book constitutes not only a guide for decision-makers in public administrations, but also a reference for scholars and experts who study public and private finances, economic development, industrial organization and the political economy.

Daniel Flores
Universidad Autónoma de Nuevo León

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Nov 13th, 2017.
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