Associated with the commercialism of infrastructure, there has been the recog- nition of the value of introducing the discipline of the private capital markets to improve efficiency in construction and operations, particularly in order to ensure that projects are completed at the best value without unnecessary delays. Along with this acceptance, it has also been acknowledged that there is not an either–or, public or private, choice to be made. Many of the benefits of the market can be obtained by combining public and private resources in infrastructure projects.
If the private sector is to take a greater role in the provision of infrastruc- ture services, it can provide capital, management, or both. If it provides either
capital or management, then the existing structure of public sector manage- ment and control will have to be changed to a more explicit system of regula- tion and monitoring of private sector bodies by public agencies. If neither is provided, then private sector ideas and thinking may need to be borrowed instead.
In broad terms there are three ways by which infrastructure can become commercially oriented (Stern and Lankes, 1998). First, at the most basic level, the public sector can be operated in a manner that resembles more closely the ways the private sector works. This means paying close attention to revenues, costs and market demands. It also involves creating a management structure that provides clear goals, makes managers responsible for performance and allows them independence to carry out their tasks. Introduction of these changes may require bringing in a private sector consultant on an advisory basis, and overcoming the peculiar difficulties that governments face in providing incentive schemes for managers of government enterprises. Second, governments can seek the limited entry of new private providers through vari- ous forms of PPP. This approach implies a more active private sector partici- pation, usually as a provider of services, as well as a constructor and designer of facilities. The basis for this involvement is usually some type of concession.
Finally, the third alternative is for governments to opt for full privatization of some public services.
Obviously, our interest lies in the partnership route. One of its attractions to many people is that it is not privatization. It thus fits in with the strong politi- cal preference in some quarters that a nation’s fundamental assets should not be permanently alienated from public ownership. However, it is often over- looked that the partnership route signals a marked change in infrastructure policy. It also brings with it new responsibilities for government agencies.
Infrastructure policy can be thought of as covering three levels:
• network planning (this means long-term planning of infrastructure at central and regional levels);
• financing; and
• operation (construction, operations, maintenance, and so on).
In the past, these three aspects were all governmental activities. Adoption of a partnership agenda is tantamount to admitting that in the areas of financing and operation, there are no persuasive market-failure arguments against a competition-oriented supply of infrastructure (von Hirschhausen, 2002). High sunk costs make direct competition less likely, but do not prevent it completely, so long as the economic policy framework remains competition- oriented and includes competition, if not in the market, then at least for the market (Demsetz, 1968).
In fact, this last point should be couched in more positive terms. Market competition is a form of coordination with intrinsic advantages over bureau- cratic organizational forms, and the discipline and incentives embodied in market contracting arrangements are valuable for injecting greater efficiency into infrastructure delivery, in the following ways:
• Agency problems, which arise due to the divergence between ownership and control of assets, are easier to deal with in the private sector through managerial incentives and market disciplines.
• The transfer of risk to the private sector provides an incentive for private entities to maximize efficiency.
• Resources are more efficiently allocated in cases where clear markets for property rights can be established.
The latter two are especially important in a partnership arrangement. An effec- tive transfer of risk from the public sector to the private sector is needed, since it is the acceptance of risk that gives the private entity the incentive to price and produce efficiently. But for this transfer to happen, a clear property right needs to be created. The conventional analysis of property rights suggests that the creation of a market for ownership rights results in an allocation of assets to owners who maximize efficiency in their use (Alchian, 1965). Within the ambit of a PPP, this suggests an allocation of responsibilities that might have the government retaining those areas where it is difficult to establish a clear contractual specification, leaving the private sector to undertake those activities for which a clear and unambiguous contract or property right can be formed.
Government, as partner in the PPP, must manage these contractual rela- tionships and also provide the network planning function. Externalities of vari- ous sorts (e.g. environmental side-effects) may require some sort of public coordination and corridor planning, but participation of the state in network planning does not rule out the private supply of the infrastructure assets and associated services.
Finance is another attraction of the partnership option. Governments have looked to forge partnerships to provide an increasing array of infrastructure, social services and regional development programmes that neither they nor the private sector are likely to have the resources to offer by themselves. The PPPs with which we are primarily concerned utilize project financing techniques in order to deliver the required private finance in a form that meets the risk–reward requirements of private financiers and suppliers of risk capital, drawing on the experience of using DBFO/BOT techniques for highways and other transport schemes. These structures achieve two purposes. First, they are devised to spread risks across a number of participants (sponsor, constructor, suppliers, financiers) including the government, which typically provides the
site, reduces legal uncertainties and purchases the output. Second, they are mechanisms for monitoring risk, and the explicit incorporation of a risk premium by private investors aids this process by making project risks more apparent.
A further attraction of partnerships is their versatility. Earlier we noted that infrastructure is often classified into ‘economic’ or ‘social’ and within these into ‘hard’ or ‘soft’ (see Table 2.1). PPPs in the UK were originally used for
‘hard’ economic infrastructure projects such as roads, bridges, ports, and so on. They then spread to social infrastructure such as schools, hospitals, prison and detention centres, sewerage and so on. Now the ‘hard hats’ have become providers of ‘soft services’ (D & P, 2001). Instead of being interested only in the construction contract and the first two years of a project, the facilitators are now servicing the asset throughout its life. Major UK construction companies, for example, have become more like facilities management companies, re- inventing themselves as project operators and service providers. They have effectively started to be infrastructure services companies, a development which helps to insulate their bottom line from cyclical construction markets.
Much the same trend is occurring across Europe and in other locations where the UK-type model has been adopted. This is an indication of the flexibility of the PPP arrangement, and its ability to engage the private sector in a number of different ways.