PPP financing in the road sector: a disequilibrium analysis based on the monetary circuit

This contribution discusses public and private financing of infrastructure acknowledging the fact that a larger set of monetary equilibria than the neoclassical barter equilibrium can prevail in the economy. In this context money is not neutral and financing has an impact on allocation. Welfare comparison should be done between two positions that remain suboptimal before and after the realization of a project rather than between a suboptimal reality and an ideal optimum, as it is usually implied in many policy discussions. A systematic welfare comparison between private and public financing of infrastructure under these assumptions reveals that, contrary to a widely held view, there are very few rational arguments that may lead to prefer private financing to public financing of road infrastructure, particularly where local incomes are low. The argument is developed in terms of “disequilibrium”, a term used to cover all situations where any of the optimality conditions that define neoclassical equilibrium is not fulfilled. These situations are of interest for economic policy, because a real economy is likely to be always in such positions. Post Keynesian analysis in general (Eichner and Kregel, 1975), and its monetary variant of the circuit, as developed notably by Parguez and Graziani (Halevi and Taouil, 2002), are seen as useful tools for the analysis of public investment policies in such a disequilibrium context (Cingolani, 2009). In particular, some features of the monetary circuit approach are well suited to address the economic problems raised by the analysis of Public Private Partnerships (PPP), notably: a) the full integration of the banking sector and the recognition of its role in monetary creation by the private sector; b) the monetary creation by the State within a macroeconomic framework fully integrating public finance; and, c) the necessary link between uncertainty and disequilibrium, which, in such a monetary context, clarifies the Keynesian causality from investment to savings. Against this macroeconomic background, a partial equilibrium analysis based on realistic microeconomic configurations of costs and transport demand parameters, shows that, contrary to the widespread idea that PPP help removing existing constraints on public expenditures, they do not add anything to the level of effective demand, being in fact the other flip of the coin of restrictive budgetary policies. PPP thus play essentially a role in mobilising part of the passively accumulated savings that the State is forbidden to attract directly because of debt ceilings. They have a softening effect on the Government debt constraints similar to that that could be reached if the Government was allowed to accrue investment like the private sector, but are a less transparent solution, because the relevant debt is not necessarily recognized in the balance sheet that services it.