The role of financial and information constraints in Public Private Partnerships

Research objectives and structure of the thesis My research objectives can be summarized in two points: At first, the thesis aims at improving the theoretical analysis of PPPs by integrating further elements that take mainly into account the presence of uncertain externalities among the phases of a project and the financial aspects of the contractual agreements. Secondly, I use empirical data to better understand what really affect the use of PPPs and which goals governments aim to attain by choosing these investment tools. To reach these purposes, the thesis is structured in three chapters that are briefly describe in the following paragraphs. Chapter 1: Public Private Partnerships: Information Externality in Sequential Investments This paper studies the benefit coming from bundling two sequential activities in a context of Public Private Partnerships (PPPs). Differently from previous literature, I introduce a source of asymmetric information in the form of an externality parameter linking the building stage with subsequent operational activity. Within this framework, PPPs allow the government to extract private information about the sign and magnitude of the externality parameter and to to minimize the informational rents needed to incentivize the builder’s effort. Our results suggest how PPPs can become those commitment devices that force governments to define more coherent and informed plans that optimize the first period welfare, improving investment to reduce unexpected ex post costs (cost overruns). Chapter 2: Public Private Partnerships from budget constraints: Looking for Debt Hiding? In this paper we examine whether budget constrained public authorities are more likely to use PPP (Public Private Partnership) than tradition procurement. Then, we study the possible mechanisms beyond this choice. The empirical test focuses on France and consists of a two stage approach. Firstly, we look at the impact of budget constraints on the use of PFI (Project Finance Initiative) and we find a positive relationship. Secondly, to better disentangle the debt hiding effect we exploit the 2011 change in the possibility to underwrite the debt of PPPs. We find that that debt hiding is a relevant, but not sufficient element for explaining the budget constrained governments’ aptitude towards PPPs. Chapter 3: Public and Private Finance of PPPs This theoretical paper studies the effect of public and private budget constraints on the government’s choice between Public Private Partnerships (PPPs) and Traditional Procurement (TP) mechanisms. Differently from the previous literature, I introduce private limited liability and public budget constraints in a context characterized by asymmetric information. In this framework, private agents are protected in case of bad outcomes from the probability of failure. Furthermore, public transfers are socially costly for the government. Under PPPs, the private consortium, thanks to its long term commitment in the project, owns an implicit incentive to invest during the building stage. As a conse- quence, the agent can accept higher levels of risks and the the government can save money in the form of incentive rents. This paper provides a theoretical explanation for the empirical evidence which shows how budget constrained governments are more apt to choose PPPs (Hammami et al., 2006; Albalate et al., 2012; Russo and Zampino, 2010; Krumm and Mause, 2012; Buso et al., 2013). The result is not derived from the presence of private financing, but it comes from the introduction of asymmetric information in conditions of financial stress.