1 THE U NIVERSITY OF T OKYO Outline Introduction 1. Related - - PowerPoint PPT Presentation



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) 東 京大 学

THE UNIVERSITY OF TOKYO

10th Conference on Applied Infrastructure Research 7-8 October, 2011

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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

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Introduction

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35,5 19,8 33,3 28,5 41,3 12,5 32,5 19,3 23,3 9,1 51,9 47,7 47,4 48,2 49,6 20 40 60 80 100 120 1 2 3 4 5

All developing Countries

Ratio of Public & Private Investments in Infrastructure in Developing countries (1996-2006)[1]

Africa Asia

Latin America & the Caribbean South-East Europe & CIS

Domestic Public Domestic Private Foreign

Private Investment commitments to infrastructure in developing countries in real and nominal terms, (1990–2008) [2]

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Introduction

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Introduction

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Why Government Commitment & Consistency?

Sample of typical PPP cash Flow The vulnerability of Long-term cost recovery

Introduction

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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 long-

lasting PPP agreements

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Introduction

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Summary of Literature: PPP as a Strategic Interaction

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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

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3D FLOWS

Your footer

Modeling Commitment & Dynamic Inconsistency in PPP

PPP as a “quasi-non-cooperative & quasi-cooperative game”

Non-cooperative Bargaining Partnership Selfish Competition

Agreement Incentive to Cheat Bidding

Outcome

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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

• n subsidies, guarantees & special

taxation

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

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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 re- election 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]

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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?

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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

• ne’s reach”[5]
• 2. Actions that leaves one in such a position that the option of

non-fulfillment no longer exists.

• 3. Invocation
• f

penalties, such that

• ne

would in all circumstances, prefer to carry out what was committed to

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Discussion

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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

• pportunistic deviation will be high, if it decides to re-
• ptimize or re-formulate its policy ex-post.

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Discussion

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Summary of Recommended options

• 1. Use of inter-locking payoff & inter-

dependent 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

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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

• wnership or operation in public infrastructure

d.

Specify the Rules to be adopted for Contract modification

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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.

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Thanks for your Time & attention

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THE UNIVERSITY OF TOKYO