Comments to Eduardo Engels PublicPrivate Partnerships: Optimal Auction and Contract Design

1
Comments to Eduardo Engels Public-Private
Partnerships Optimal Auction and Contract
Design

• Juan Benavides
• Inter-American Development Bank
• Brasilia
• April 26, 2005

2
The diagnostic

• I agree on the impact of two design flaws of
  programs designed to attract private capitals to
  infrastructure (i.e., weak regulation and poor
  risk allocation)
• Privatize now, regulate later reflects both an
  ideological bias and lack of public funds
  (generalized crises of public provision of
  infrastructure). Abuse of privatizations scope

3
Improvements in risk allocation

• Engel, Fischer and Galetovic have led the
  proposals to improve concession contract design
• The successful application of the LPVR approach
  heavily relies on
• Effective contract enforcement by courts
• Moderate level of technical uncertainty (advanced
  designs)
• High quality forecasts of initial traffic flows

4
Improvements in risk allocation

• Plain vanilla LPVR may not avoid renegotiation
  or endogenously filter white elephants
• In greenfield large, complex projects (tunnels)
• If the starting traffic level is so low that
  expected income will never catch up to break even
• When strategic operators take advantage of weak
  enforcement to make renegotiation profits ex post
  
• When the project is paradoxically- too
  profitable and public funds are very scarce
  (expropriation risk)

5
Improvements in risk allocation

• The perfect example of a good application
  Santiago-Valparaíso toll road
• Maintenance of an existing highway with no
  competing alternatives
• High, stable traffic flow recorded for more than
  23 years
• Culture of payments
• Credible courts and public guarantees

6
Application scope

• LPVR brings substantial efficiency gains whenever
  applicable
• In countries with high redistribution pressures
  and imperfect property rights protection,
  contract design should reflect the relevant
  constraints
• Second-best choices are necessary to minimize
  expropriation risk or the deadweight losses of
  opportunistic renegotiation (highest priority)

7
Application scope

• Lesson from China
• In a system where courts cannot be relied upon
  to protect property rights, letting the
  government hold residual rights in the enterprise
  may have been a second-best mechanism for
  avoiding expropriation. In such circumstances,
  the expectation of future profits can exert a
  stronger discipline on the public authority than
  fear of legal sanction. Private entrepreneurs
  felt secure not because the government was
  prevented from expropriating them, but because,
  sharing in the profits, it had no interest to
  expropriate them.
• (Rodrik 2004)

8
Financial structures for economically sound
transportation projects
Case 1 LOW fiscal space credibility
- PPPA profit-sharing
- PPPA profit-sharing - Single-payment
outsourcing contracts
() (-)

Private profitability
- PPPB public/community procurement (matching)
evaluate tax earmarking
- PPPC concession revenue supplemented by land
use rights
Low High
Contract enforcement by courts
9
Financial structures for economically sound
transportation projects
Case 2 HIGH fiscal space credibility
- PPPA profit-sharing

• PPPD concession with public guarantees
• Pure concessions

() (-)

Private profitability

• Civil works
• Single-payment outsourcing contracts

- PPPE classic PPP with recurrent public
payments
Low High
Contract enforcement by courts