The term public-private partnerships, often abbreviated PPP, has come to include two very different arrangements. One arrangement, which I prefer to call franchises, has proven very successful. Advocates of the other arrangement, which I shall call corporatism because the name I prefer is too emotion-laden, are riding on the coattails of the success of franchises.
The Antiplanner discussed this subject six months ago. But the topic has come up in the comments so it is worth repeating.
In a franchise, someone identifies a need for some service and the government auctions the right to provide that service to the highest bidder. Usually, the high bidder wins either the right to use a public right of way or some guarantee of a monopoly or both. But the winner receives no subsidies — instead, it pays a pretty penny for the right to provide the service.
Such franchises have a long history: the Hudson’s Bay Company and East India Trading Company (the villain of Pirates of the Caribbean parts 2 and 3) were both franchises, with trade monopolies in selected parts of the world guaranteed by the British government. The incredible streetcar network that blanketed thousands of neighborhoods in hundreds of American cities at the turn of the 20th century were franchises. Electricity, telephone, and cable television services have all been franchises.
In some cases (such as streetcars), the only reason the government is involved is because it happens to own the right of way. In other cases (such as cable TV), the government wants to create a monopoly so that it can earn higher royalties from the service provider. In a few cases (broadcast radio & television), all the government does is create a property right where none existed before.
Although a franchise may be initiated by a government, ultimately it is market driven. No one would pay for the right to offer a service unless they could expect to make a profit selling that service to consumers. That means there is a limit to how much service the franchisee will provide. Even if the franchisee enjoys a monopoly on that particular service, competition in the form of different technologies or different governments will tend to keep prices down.
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Although the government may have started the service with good intentions — perhaps to serve some low-income or otherwise underprivileged members of society — soon the main constituents for the service become not the intended beneficiaries but the companies providing it. Since there is no market test, the only limit to the amount of service that can be provided is the amount of deficit the government is willing to incur to support it.
Soon the corporations become the biggest cheering leaders for the service. They work with the government to plan and promote more services — and more subsidies.
I’ve called this corporatism, but that isn’t really the best term. Wikipedia defines corporatism as a “system in which power is given to civic assemblies that represent economic, industrial, agrarian, social, cultural, and professional groups . . . known as known as corporations (not necessarily the business model known as a ‘corporation’ though such businesses are not excluded from the definition either).” Wikipedia goes on to say that “Corporations are unelected bodies with an internal hierarchy; their purpose is to exert control over the social and economic life of their respective areas.”
The better term is fascism — not Hitler’s Naziism but Mussolini’s. As Wikipedia notes, Mussolini wanted fascism to be a “third way” to capitalism and socialism. Unlike capitalism, government would set the goals. Unlike socialism, there would be private property and private organizations, but they would work at the government’s pleasure to serve the “national interest.” Fascists were also spiritual, militaristic, and believed in the need for a cultural revolution.
It is always possible to carry such analogies too far. But many of the flaws of fascism are also flaws in the corporatist model. The model assumes that government can set goals that somehow best represent the needs of its citizens. But ends up giving too much power to groups whose primary interest is to raid the treasury. As a result, it is doomed to failure.
Needless to say, rail-transit schemes that claim to be public-private partnerships follow the corporatist model. Tollroad proposals usually follow the franchise model. Those who believe in the franchise form of public-private partnerships should stop using the PPP term and switch to franchise or another term to clearly distinguish their model from corporatism.
I didn’t think there were any rail-transit schemes looking to go down the PPP road. I thought they were all unionized and kept directly under the umbrella of the transit agency.
Prk166,
Yes, there are some PPP rail transit arrangements that have been attempted. I say attempted because their track record is not encouraging. Read this City Journal magazine link which discusses the fate of perhaps the largest and most prominent PPP that has been implemented for rail transit so far – the London Underground and the MetroNet PPP:
http://tinyurl.com/2d949g
Briefly, the UK government at the turn of the decade decided to offer up the London Tube system up for PPP arrangements. 2/3rd’s of the entire operation when to MetroNet, a consortium composed of Bombadier and four other companies. The rest went to another PPP headed by Bechtel. The MetroNet PPP gave up and threw in the towel earlier this year because they determined that they simply could not continue to operate under the terms offered by the UK government.
In a franchise, someone identifies a need for some service
I doubt most people “need” the services provided by most franchises. “Demand” is probably a better word, but even then, there might not really be a demand for the service until after it exists.
In a few cases (broadcast radio & television), all the government does is create a property right where none existed before
So: government creates property rights?
Antiplanner,
in the UK, the second meaning is intended by the term PPP (or PFI). Usually, the private company borrows money from the market, builds the development, and then leases it back to the government. This increases efficiency, at least in principle, because the developer has to build AND run the development, so they don’t cut corners in building it properly.
Most of the claims for this approach are overcooked. The developer borrows at a much higher rate than the government, since they don’t have the same solvency behind them – although if they’re lucky, they can refinance the deal, and add the difference to their pile of money.
The building is more efficient, but only in comparison to the previous cost plus arrangements. If previously the development had been contracted, it is hard to see why the development would have been less efficient than PPP.
Because the building is leased, there is a complex web of contracts. So, if a new plug socket is required, an electrician cannot be called out. Instead, the management company has to do the job, slower, and with their mark-up.
Some PPP arrangements fail, taking out the company, but a few (especially where it creates a monopoly or near monopoly) is just money for old rope. The Skye road bridge is a classic example of this, where a monopoly ferry service was replaced by a monopoly bridge. Is this an example of the franchise system going wrong? It stands in considerable contrast to the M6 Toll Road, where the public have a choice to pay the toll on the new road, or use the old road.
http://en.wikipedia.org/wiki/Skye_Bridge
This is an interesting topic, and the distinction between franchises and corporatism is substantial.
These types of schemes (corporatist) have been used in the U.S. in the urban transit sector. Mostly they are used for providing new services (e.g. new LRT lines) and involve some form of design-build or design-build-operate scheme where the private-sector consortium offers a bid to build and operate the scheme. I believe Denver is trying this, but really only as a cost-saving measure in the face of its huge cost overruns.
One could also argue this applies to competitively tendered bus services. In both cases though, the savings are fairly small. As Cliff Winston and Chad Shirley have argued, the benefits of privatization in this area can only be achieved if the private provider is also allowed to decide on service levels, since it is here (along with pricing) that the greatest inefficiencies exist. The benefits of PPPs, at least in the case of franchises, stem largely from the reallocation of risk.
To Dan’s first point, there are cases where a franchised service is needed. Consider the case of electric power generation. Most customers demonstrate that they ‘need’ this service, as evidenced by the fact that even very poor households consume some electricity. The remainder of demand is mostly a function of income, prices and preferences. In many other areas, need vs. demand is more of a gray area (do people need cable TV?), but this should not prevent someone from providing it. If the market for the good is truly a natural monopoly (electric power generation fits this characterization reasonably well), then some type of franchise arrangement may be necessary.
I also want to comment on one of Francis’ points. The issue of public vs. private financing is more complex than a simple comparison of interest rates. In Flyvbjerg, Rothengatter and Bruzelius’ recent book on megaprojects, they remind the reader that this disparity in interest rates merely reflects the fact that most governments retain the power to tax in order to raise funds. In essence, the public sector is transferring project risk to taxpayers. This risk is implicitly absorbed in the form of lower government borrowing rates. When a private firm must raise capital by borrowing in capital markets, the interest rate they pay must include project risk, hence these rates can be much higher, especially for long-term projects. This is preferable however, since the private firm must take full account of the opportunity cost of the capital they have tied up in a project.
I worry that PPPs for toll roads will continue to be limited to new construction in the coming years. This is a shame, since waiting for existing roads to become so bad that users would be willing to pay the long run marginal cost of a new facility ignores the substantial congestion costs on existing facilities. However, under current arrangements, this cost will probably continue to be a deadweight loss in the forseeable future.
Though the problem now is that governments have spent too much money on roads, so now they need to cut them back or else start spending a lot of money of rail lines to break even.