Public Private Parternships

in a Changing Environment

Emmanuelle AuriolToulouse School of Economics

World BankJune 9 2011

The big question

Where is the optimal

frontier between the

State and the

market?

Government for what ?

Essential public goods (army, police, justice)

Externalities (education, health care, tobacco, oil)

Public utilities (electricity, water, gas, telecommunication, post, railroad,)

Infrastructures (bridge, road, dam...)

Macro-economic policy (budgetary and monetary)

Providing public utilities services

Public => Post

Public-Private Partnership => water, electricity

Privatization => mobile telecommunication

What is optimal ?

What are the trade-offs?

The choice between public and private: an

ideological question ?

« Oui, désormais, c’est le rôle de l’Etat d’assurer lui-même la

mise en valeur des grandes sources d’énergies: charbon,

électricité, pétrole, ainsi que les principaux moyens de

transport… C’est son rôle de disposer du crédit, afin de diriger

l’épargne vers les vastes investissements... »

Le Général de Gaulle, Assemblée Constituante, mars 1945.

Not very different in the US!

1930: Federal Power Commission; 1931: Food and Drug Administration; 1934: Federal

Communications Commission; 1936: Federal Maritime Commission; 1937: Agricultural

Marketing Service, Department of Agriculture; 1938: Civil Aeronautics Board

=> In 1975 ¼ of the US GNP was produced in regulated industries.

Why PPPs now and not in the fifties?

The end of the cold war and

major innovations

+

Creation of integrated markets

Emergence of the global company:

merger and acquisition

New context, new rules…

Deregulation:

Public/regulated monopoly => regulated oligopoly

and/or antitrust law (e.g. EU)

Privatization:

Transition countries: efficiency

Structural adjustment programs: between 1980 and

1996 developing countries have reduced by half

public ownership (from 16% to 8% of GDP).

Rich countries: controlling inflation and government

size.

Privatizations

PPPs in infrastructures

Internal benefits of privatization

Firms focus on profit (no patronage, no

macro-economic goals such as employment

policy or land planning).

Hard budget constraint (no taxpayers to bail

out the firm in case of deficit)

=> Costs are reduced (diminution of the work force

and of moral hazard problems)

External benefits

Supply of private capital

=> New investments can be realized in time of

budgetary crisis !

Costs of privatization

Prices rise

Cream skimming

Different types of PPPs

Concessions BOT (BOOT, DBOT, DBOOT): private investissement in infrastructures, long period (35 to 99

years)

Affermage/leasing, French concession: public

infrastructure, exploitation and some investissements are private,

shorter period (10 to 18 years)

Management contract: service externalisation, short

period (3 to 8 years).

The first PPPs: industrial revolution and

government budget constraint

Turnpike roads in the UK 1660 (concessions)

concessions-BOT today

Eurotunnel BOOT of 65 years

Autoroute 69 (Southern Indiana Toll)

concession-BOT of 75 years

International airport of Islamabad, Pakistan

Nhon Trach bridge, Saigon

TGV Paris-Bordeaux concession 35 years

Viet Nam: Phu My 2.2 Power Project

Services: outsourcing and management

contract

Water, waste management, public

transportation.

Education: schools, teaching institutions

Health care: private hospitals, doctors

Post office kiosks, taxi-bus

Some economic analysis…

Gouvernement has many missions:

Max WG(public good, externalities, infrastructure, public utilities, redis,…)

slc PubGood + Edu+ Health + Infra+ PubUtil + Redis < BG (l)

=> l is the opportunity cost of public funds (short run).

Public or private?

New infrastructure => C(Q)= K+bQ

Uncertainty: IID G(b), g(b)

Firm profit => P(Q)= P(Q)Q- C(Q) + t

Consumer Surplus => Sc(Q)=S(Q)-P(Q)Q

Government goal: W= P+ Sc- (1+ l)t

,b b b

Private: t=0 and laissez-faire

The firm maximizes P(Q)= P(Q)Q - bQ- K

=> Qm(b)

=> EbWm= E[S(Q

m) – bQ

m] -K

( ) 1

( )

P Q

P Q

b

-=

Public: and regulation

Max W = S(Q)- bQ- K - lt

slc (IR) P(b)

(IC)

=> Qr(b)

0

( ) ( )Qb bP = -

0t

0 rPl b= =

( )

1 ( )( ) ( )

Gr m m

gP P P

l bb b

l bl +

+ =

( )( )

1 ( )( ) 1

( ) 1

G

gP Q

P Q

l bb

l b l

l

++

-=

+

Production schemes

Optimal Privatization policy

Demand is linear P(Q)= a-bQ and cost are uniformly distributed.

=> Optimal privatization policies differ in rich and in poor countries.

Numerical computations of l̂

Public Private Partnership

( ) ( )Mb bP P

( ) ( )Qb bP = -

We can do better than laissez-faire by

contracting with the private firm.

Max W = S(Q)- bQ- K - lt

slc (PC)

(IC)

There is b0

so that for all b< b0

it is optimal to

contract ex-post with the firm, laisse-faire is

opimal otherwise.

Optimal contract: only efficient firms get a

profit bonus

Proposition

Assume l is not too high and let F be the

franchise fee (or subsidy) the private firm

pays/asks to get the market. Private provision

dominates public provision if and only if:

( )mF b P

Optimal choice of outsourcing

In rich countries contracting out to the private sector

is efficient in high technology industries or in

unprofitable segments of public utilities ( ).

It is also optimal when the franchise fee F is large

enough.

In poor countries, outsourcing is efficient each time it

allows the creation of a service or the financing of an

infrastructure that would not exist otherwise.

( ) 0bP <

There is an optimal size for the

government…

…which depends on macro-economic conditions