Role of PPPs (Public Private Partnerships) in Transition ( by Arthur Dent)

Guest post by Arthur Dent via Bill Kerr blogspot .

The need that has not been acted on is investment having become generally paralysed by world economic crisis. Not just traditional infrastructure but all kinds of large scale fixed capital construction projects are needed. The essence of transition from capitalism under such a scenario is that it is partially public and partially private.

* * * *

PPP = Public Private Partnerships

A scenario for transition from capitalism with socialized investment following another Great Depression and its (im)plausibility is discussed elsewhere.

For present purposes those assumptions are as arbitrary as the selection of some hypothetical specific PPP infrastructure project to pitch to some hypothetical target audience.

The need that has not been acted on is investment having become generally paralysed by world economic crisis. Not just traditional infrastructure but all kinds of large scale fixed capital construction projects are needed.

The essence of transition from capitalism under such a scenario is that it is partially public and partially private.

PPPs would be used for all major fixed capital construction projects that are significant for planning resumption of economic growth and ending mass unemployment. Buildings and plant that were previously (not) being privately financed, by single enterprises or project finance, not just the closely related “utilities”. Public institutions would also initially be largely untransformed, so public procurement of a traditional public utility infrastructure facility by a public agency would be subsumed under PPP arrangements as just another private participant that happens to be a public agency.

Public financial and economic planning and management organizations would be involved either as sponsors or minor participants in many types of build, own and operate projects, often taking substantial financial positions in both debt and equity based on the expropriated funds they are now able to invest as well as making ordinary commercial PPP arrangements with private participants.

The relatively small amount of economic and management expertise fully supportive of transition available to an inexperienced government would be heavily focused on the preparation, procurement and contract management/implementation of PPPs. They would have to structure the contracts so the private participants use their know how to maximize the public benefit in their own commercial interests. This would be very difficult and error prone, but not as implausible as simultaneously taking over all existing large economic institutions without enough skills to actually manage them in the public interest.

The much wider role of PPPs requires much better resourced public institutions responsible for PPPs. The relatively small numbers of government decision makers with adequate skills must supervise and structure appropriate incentives to motivate, much larger number of employees and consultants recruited from the private sector for their know how, despite their lack of support for transition.

Currently known “best practices” for PPPs would be generally applicable. There is no point in listing them. But the assumption of quite different circumstances imply many new lessons could only be learned from experience with at least the following differences from the usual circumstances.

1. Much greater transparency and much less corruption would be imposed on both the public and private participants as part of the broader social changes involved in transition.

2. Greater flexibility for detailed renegotiations would be necessitated by the circumstances of economic crisis and the more dynamic situations arising from transition.

3. Political, foreign exchange and national macroeconomic risks (interest rates etc) would be exclusively borne by the public participants and corresponding contingent liabilities and hedging or insurance costs appear openly on the central balance sheets. The public institutions responsible for exchange rates and macroeconomic stability would be closely involved in understanding the financial flows and risks they are assuming and the prices they require for asuming those risks and any hedging arrangements they may be able to make separately. Both international and local private participants would not need to make separate judgments or their own hedging arrangements for particular projects but only apply the sovereign risk ratings assessed uniformly by their own trusted ratings agencies.

4. Land use and resource management public agencies would likewise manage and appropriately price the responsibilities for land acquisition, site and regulatory risks.

5. Design, operations, construction, completion and maintenance performance risks would be exclusively borne by the private parties directly responsible for each aspect with detailed incentives tailored to reward overperformance and penalize underperformance. They would be carefully separated according to the expected and actual costs and risks borne by the participants engaged in each aspect and related global, national and sectoral statistical indexes.

6. Allocation of upside and downside market risks for supply of inputs and sale of outputs would be significantly more complex since the expropriation of private wealth for public investment in PPPs was made necessary by lack of profitable investment outlets in the prevailing market conditions of economic crisis.

The aspect for which each private participant is responsible must be commercially viable to that participant at the low competitive rates of return prevailing under crisis conditions. But the overall project need only be value for money to the public participants based on accepting an even lower (or even negative) return on their investment in order to achieve planned economic growth and rapid recovery from mass unemployment.

4 thoughts on “Role of PPPs (Public Private Partnerships) in Transition ( by Arthur Dent)

  1. If we are talking of transition from crisis to “normal” economic conditions then this may be a plan but of course weaning off it would be important. The heading however says transition from capitalism and I do not think this is a plan if that is the intention.

    I think there will be some short term issues and this may or may not be one of them. The long term transition however I assume will not include this plan.

    I am pleased to see transparency has made it to the top. However you seem to be saying it is not the lack of capital but the lack of expertise that is driving this proposal. This as I see it is a short term problem and definitely related to the transition from crisis to “normal” economic conditions.

    We are a small band of interested persons and it is hard to imagine having a party that is large enough to overthrow capitalism. If that party existed and it it was able to overthrow capitalism it would be because a large number of people could see the potential in a new system. If this was to be the case then the “The relatively small amount of economic and management expertise fully supportive of transition available to an inexperienced government” would not be so small. It is easy to imagine under the present political conditions that there might be a large shortage as we have not identified much support not only in this area but most others also.

    However I think if it was to remain this way we wouldn’t have to worry because capitalism would prevail. There would be plenty of people opposing and most undecided. The task isn’t to underestimate the ability of these people but rather to encourage the risk and the imagination these people have. they have been stifled for decades and have immense potential and are just busting to have a go!!!

    We may not have the exact plan for day one but it doesn’t mean there can’t be one. I am concerned that this may be a conservative approach based on the fear of failure. I am sure it isn’t but it has that ring to it. We need to develop a plan for keeping things going and identifying problem areas but assume this can’t be done until we have a better idea of where we are getting our support. Maybe we need another plan as well that assumes we do have support in key areas and we may be able to muster enough “expertise”.

    In the early stages I am more concerned about supporters understanding the direction and the dynamic we are introducing rather than keeping things rolling with an air of state capitalism. Imagine it will be chaotic with heaps of mistakes and wouldn’t hide from this at any point, it should be fun.

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  2. Hi Tom, this part was written very hastily for a MOOC on PPPs. This discussion really belongs with the first part (which was written even more hastily, partly as necessary background to hopefully make this part at least intelligible for the PPP course, partly for people like you.

    So please continue this particular discussion in the other part. (BTW Barry, the two should be properly linked to each other as the original’s were in Barry’s blog).

    Key premise of scenario in first part is that in some minor countries governments have come to power that want to start transition but they are NOT in a position to take ownership of the key means of production because they have to remain within the globalized economy in which those means are largely owned by nationals of other countries, including the dominant major capitalist countries that still have counter-revolutionary governments.

    Nevertheless they take they are able to expropriate their own top capitalists (much of whose wealth is likewise shares in overseas companies) and give an example which when followed elsewhere would result in the expropriation of all large capitalists and so a quite different scenari.

    But that situation implies only that they have significant investment funds unlike the situation faced by other governments that depend entirely on capital markets. They do not have ownership or control of the most important existing enterprises in their country, so there is indeed a “lack of capital”. But have come to power claiming that they can do something to end mass unemployment and get the economy moving again unlike their predecessors.

    Again, please discuss above in other thread.

    The only consequence for this thread is that in that scenario your premise of widespread support for transition from capitalism and consequent availability of economic know how (and of no lack of capital) does not follow at all. There may simply be sufficient support for the minimal measures, including transparency and wealth taxes directed only at the LOCAL “1%” necessary to end mass unemployment but strong hostility from the bulk of people with management know how, who see themselves as targets.

    Whether plausible or not, it would not be an option in that situation to simply refuse to attempt to do anything about mass unemployment until a simultaneous world revolution became possible.

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  3. ok makes more sense and will try to track down original.

    the size of the countries would make a huge difference (spain italy belgium or ireland portugal and latvia)

    We are then not talking lack of expertise but rather lack of support.

    Capitalism does have it’s enemies also and a lack of motivation and incentive to revolutionise things. Assume we would have an advantage and the ability to negotiate a global market seems to be more of a problem.

    Still see this as plan B. If there are a few advanced capitalist countries and that remains for some time and I do not think this would be the case, in fact personally see it as only a small chance but then again am a supreme optimist.

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