PPP's - lecture content Flashcards
what are the 3 main issues with public provison?
1) wrong projects are built bc of lack of planning and synchronity
2) poor service delivery bc contracts are poorly enforced and poor maintenance (Wartung) of existing projects
3) costs are too high bc of poor/hasty project design and corruption
what is the issue with the synchronity
Inauguration (Einweihung) casts a positive light on politicans, but planning takes usually 3-4 years so longer than the duration of a particular government
how does public provision looks like?
the government:
- finances the project
- hires a firm to build the project
- hires another firm to maintain and operate the project
how does a public-private partnership looks like?
- long-term contract 20-40 years
- the firm finances, builds, operates and maintains the infrastructure. when the concession ends the assets revert to state owenership
- revenues for the firm come from user fees
Summary of efficiency gains
- avoids bureaucracies costs
- filters white elephants (if the concessionaire bears demand risk)
- project finance
- better maintenance
Renogiations
what are problematic renegotiations
- renegotiations that are used as bailouts for private companies
- renegotiations lead to adverse selection, moral hazard, white elephants and soft budget problems
Name a notable example of the negative impacts of renegotiations
construction of rainwater collection system in stgo in 2004. contracting an existing concession companyled to higher costs, a lack of congressional oversight and extension of the concession period
what is the “Chicago-Style Argument”?
some economist argue that renegotiations are harmless since companies take the possibility of renegotiation into account when they submit their bids
How to avoid opportunistic renegotiations?
1) transparency and openness: publishing all renegotiated contracts
2) competetive bidding: all reneg. above a certain threshold should go to competetive bidding
3) technical review: technical panel to review and approve reneg. to prevent opportunistic behavior
how does Chile’s 2010 reform look like?
1) Transparency Measures
2) competetive bidding for major renegotiations
3) independent technical panels: they evaluate and approve renegotiaion requests includings experts to estimate the feasibility and necessity of contract changes
4) Risk-Bearing: of financial burden carried more by private partners, espec. when the risks stemmed from factors within their control
define the winner’s curse
when the bidder overestimates the project’s value and submits an excessively high bid.
-> resulting in lower-than-expected profits or even losses for the winner
3 causes for the Winner’s curse
1) Uncertainty (with future demand or construction costs)
2) Optismism (and undererstimating risk)
3) Information Asymmetry (as they dont have all relevant information abt the project)
how could you mitigate the winner’s curse?
4
1) multiple estimates (from various teams to reduce the risk of overvaluation)
2) consideration of bidder number (more conservative approach when many bidders expected)
3) transparent bidding processes (to make sure all bidders have the same information)
4) limit on renegotiations
for what kind of contracts are flexible-term contracts, also called PVR contracts (present-value-of-revenue) especially usueful?
for projects with high demand risk such as highways and airports.
what are the advantages of PVR contracts?
4
- reduced risk and costs: contract lenght is automatically adjusted based on demand –> saves up to 30% of the initial investment due to lower risk premiums
- reduced renegotiations –> more predictable outcomes
- simplifies early termination made by government with fair compensation. not like the non-compete clauses with the project in california leading to years of negotiations
- mitigation of winner’s curse bc when no demand risk, bidders focus on cost efficiency leading to more competetive bids
