Ppps, The Business Cycle, And The Political Cycle

Bundling or public-private partnership (PPP) contracts, by contracting simultaneously the construction of an infrastructure and its operation for a long period, allow a single private contractor to internalise maintenance and operating costs in the decision regarding initial investments, increasing efficiency in the use of public resources, when compared to traditional procurement, in which infrastructure and operation are unbundled. Traditional procurement for infrastructure imply an erratic maintenance schedule, influenced by economic cycles (procyclicaly or contracyclicaly) and by political cycles. But PPPs, having predetermined minimum service levels, require an optimised (whole-life costing) maintenance programme, quite different from the traditional one. The benefits are obvious for the users or operators of the infrastructure, but the macroeconomic and political-cycle consequences of an extended use of PPPs present mixed results. With a switch from investment expenditures (under traditional procurement) to long-term service payments (under PPPs), governments have less scope for changing expenditure in response to the business cycle. The macroeconomic consequences of this switch depend on the effectiveness of discretionary fiscal policy, as well as on its usefulness. But an almost predetermined maintenance schedule, combined with steady long-term service payments in lieu of lumpy, politically influenced investment expenditures could help smooth the business cycle and reduce the links between political cycles and economic cycles. Even if there are costs in terms of foregone fiscal flexibility, they would have to be compared to the potential benefits of PPPs, especially better long-term budgetary planning and a more efficient use of scarce public resources. The paper draws on the European PPP experience in order to present the impact of PPP contracts on the patterns of public investment and on the business cycle. The long-term consequences of the increased use of PPPs are still not measurable, but some political-economic effects are already noticed.