Government Commitment and Dynamic inconsistency in Public-Private Partnership for Infrastructure Anthony T. ODOEMENA (Ph. D Candidate, the University of Tokyo) & Masahide HORITA (Professor, the University of Tokyo) 10th Conference on Applied Infrastructure Research 7-8 October, 2011 1
Outline 1. Introduction 2. Related Literature 3. Modeling Commitment and Dynamic Inconsistency in PPP 4. Discussion a. The Problem of Imperfect Commitment in PPP b. The Problem of Inconsistency 5. Summary of Options and Recommendations 2
Introduction Ratio of Public & Private Investments in Infrastructure 120 in Developing countries (1996-2006)[1] 100 80 51,9 47,7 47,4 48,2 49,6 60 40 12,5 32,5 19,3 23,3 9,1 20 35,5 19,8 33,3 28,5 41,3 0 Africa Asia Latin America & the Caribbean All developing Countries South-East Europe & CIS 1 2 3 4 5 Foreign Domestic Private Domestic Public 3
Introduction Private Investment commitments to infrastructure in developing countries in real and nominal terms, (1990 2008) [2] 4
Introduction 5
Introduction Why Government Commitment & Consistency? Sample of typical PPP cash Flow The vulnerability of Long-term cost recovery 6
Introduction Main Focus 1. factors that motivate incumbent governments to renege on the commitment made by previous regimes 2. the devices by which government gets committed to fulfilling a certain obligation in PPP 3. the effects of government bargaining personality on longlasting PPP agreements 7
Summary of Literature: PPP as a Strategic Interaction 8
Other studies: Effects of Commitment &Consistency 1. Policy inconsistency, stochastic re-planning has negative effect on private rational expectation modeling 2. Dynamic inconsistency can contribute to policy inefficiency. 3. An argument for rules rather than discretion Limitations of Literature Mainly on macro-economic variables. The assumption that only the Private agent is liable to moral hazard in PPP 9
Modeling Commitment & Dynamic Inconsistency in PPP 3D FLOWS PPP as a quasi-non-cooperative & quasi-cooperative game Bidding Agreement Incentive to Cheat Outcome Non-cooperative Bargaining Partnership Selfish Competition Your footer 10
The Problem of Government Commitment in PPP Regarding government behavior in PPP, the following actions & Strategies have been observed: 1.Expropriation, and discriminatory polices 2.Deviation from agreement taxation on subsidies, guarantees & special 3.Breach of clauses that seek to insure the private investor 4.Nullifications of agreements entered into by previous regimes 5.Delay of private s payment, etc 11
Dynamic Inconsistency Some Observations 1. 79% of the total government-led renegotiations in PPP (a sample of 307 water and transport projects in Five Latin American countries between 1989 and 2000) occurred after the first election that took place during the life of the project [1] 2. Sometimes, government decided to make unilateral changes on the initial terms of the partnership to secure popular support during a reelection campaign. 3. a major obstacle to the PPP experience is frequent change in political attitudes towards PPP and the collection of user charges or tolls [2] 12
Main Questions: 1. What are the devices by which government gets committed to fulfilling a certain promise or obligation in PPP? 2. Is it possible to make the benefits of non-commitment & unilateral changes less desirable for the government in PPP? 3. Is it possible to reduce the incentive for sequential policy uncertainty and stochastic re-planning in PPP agreements? 13
Discussion Dealing with Imperfect Commitment & Opportunistic Inconsistency 1. A potent means of commitment, and sometimes the only means is a pledge that places concession visibly beyond one s reach [5] 2. Actions that leaves one in such a position that the option of non-fulfillment no longer exists. 3. Invocation of penalties, such that one would in all circumstances, prefer to carry out what was committed to 14
Discussion Some Insights 1. The possibility/efficiency of deterrence enforcement 2. The value of the maximum punishment vis-à-vis actual benefits of deviation 3. The ease of proving non-compliance before a law court 4. The legality of the commitment 5. Summary: If the government commits to a set of actions that are discretional ex-ante, the incentive for opportunistic deviation will be high, if it decides to reoptimize or re-formulate its policy ex-post. 15
Summary of Recommended options 1. Use of inter-locking payoff & interdependent expectation a. Participatory Public-Private-Partnership b. Build-Transfer-Lease schemes c. Minimum Revenue Guarantees 2. Specify all government commitment in enforceable terms a. to facilitate the detection of non-compliance. b. to facilitate the right to compensation 16
Other Recommended options 1. Introduction of Termination Payment - if the government fails to fulfill its commitment for a stated time - to limit to scope of government inaction 2. Making the Process of Unilateral deviation difficult a. Harmonize PPP policy with all applicable laws b. Repealing laws that allow unilateral contract modification c. Review constitutional provisions that are inimical to private ownership or operation in public infrastructure d. Specify the Rules to be adopted for Contract modification 17
References [1] United Nations Conference On Trade And Development (2008) World Investment Report 2008: Trans-national Corporations and the Infrastructure Challenge. United Nations: New York and Geneva. [2] World Bank Database on Public-Private Infrastructure. [3] Guasch J.L., Laffont J.J., & Straub S., (2006). Renegotiation of Concession Contracts: A Theoretical Approach. Review of Industrial Organization 29: 55-73. [4] Brench, A., Beckers, T., Heinrich, M., & Von Hirschhausen, C. (2005). Public- Private Partnerships in New EU Member Countries of Central and Eastern Europe. European Investment Bank 10 (2). [5] Schelling, T. C. (1960). The Strategy of Conflict. Cambridge, MA: Harvard University Press. 18
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