Efficient Public-Private Capital Structures

Moszoro, Marian (2014): Efficient Public-Private Capital Structures. Published in: Annals of Public and Cooperative Economics , Vol. 85, No. 1 (March 2014): pp. 103-126.

Abstract

This paper presents a rationale for hybrid public-private capital structures in public utilities. The public sector can borrow money cheaper, while private investors can spawn life-cycle cost savings. When investment vehicles enable the internalization of the financial advantage of the public sector and the managerial advantage of the private sector, a Pareto-efficient capital structure is achieved with both the public and private parties as shareholders. I show how different knowledge transfer schemes determine the optimal shareholding structure for the utility company.

• Item Type: MPRA Paper
• Language: English
• Keywords: Public-Private Partnerships, Ownership Structures, Public Investment Policy, Knowledge Transfer, Water Utilities
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; H - Public Economics > H4 - Publicly Provided Goods > H43 - Project Evaluation ; Social Discount Rate; H - Public Economics > H5 - National Government Expenditures and Related Policies > H54 - Infrastructures ; Other Public Investment and Capital Stock; L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise > L32 - Public Enterprises ; Public-Private Enterprises; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L95 - Gas Utilities ; Pipelines ; Water Utilities

References

Ahadzi, M. and G. Bowles (2004). Public–private partnerships and contract negotiations: an empirical study. Construction Management and economics 22(9), 967–978.

Arrow, K. J. and R. C. Lind (1970). Uncertainty and the evaluation of public investment decisions. American Economic Review 60(3), 364–378.

Bailey, M. J. and M. C. Jensen (1972). Risk and the discount rate for public investment. In M. C. Jensen (Ed.), Studies in the Theory of Capital Markets. Praeger Publishers.

Baumol, W. J. (1968). On the social rate of discount. American Economic Review 58(4), 788–802.

Beato, P. and A. Vives (1996). Private sector participation in infrastructure: risk, fiscal, and efficiency issues in public-private arrangements for the provision of services. Inter-American Development Bank, Social Programs and Sustainable Development Dept.

Bondal, J. R. (2005). Market-type mechanisms and the provision of public services. OECD Journal on Budgeting 5(1), 79–106.

Brealey, R. A., I. A. Cooper, and M. A. Habib (1997). Investment appraisal in the public sector. Oxford Review of Economic Policy 13(4), 12–28.

Broadbent, J. and R. Laughlin (2003). Public private partnerships: an introduction. Accounting, Auditing & Accountability Journal 16(3), 332–341.

Buccirossi, P. (2008). Handbook of antitrust economics, Volume 1. The MIT Press.

Coase, R. H. (1946). The marginal cost controversy. Economica 13(51), 169–182.

Corbacho, A. and G. Schwartz (2008). PPPs and fiscal risks: Should governments worry? In G. Schwartz, A. Corbacho, and K. Funke (Eds.), Public Investment and Public-Private Partnerships — Addressing Infrastructure Challenges and Managing Fiscal Risks. Washington, DC: International Monetary Fund.

Cruz, N. F. and R. C. Marques (2012). Mixed companies and local governance: no man can serve two masters. Public Administration 90(3), 737–758.

Diamond, P. A. (1967). The role of a stock market in a general equilibrium model with technological uncertainty. American Economic Review 57(4), 759–776.

Dreze, J. H. (1974). Discount rates and public investment: A post-scriptum. Economica 41(161), 52–61.

Eaton, D., R. Akbiyikli, A. Akintoye, and M. Beck (2009). Innovation in ppp. Policy, Finance and Management for Public–Private Partnerships, 303–26.

Engel, E., R. Fischer, and A. Galetovic (2008). The basic public finance of public-private partnerships. In University of Yale Working Papers. New Haven.

European Commission and Others (2004). Resource book on PPP case studies. Technical report, Directorate General Regional Policy.

European Investment Bank (2004). The EIB’s role in public-private partnerships. Technical report, European Investment Bank.

Fisher, A. C. (1973). Environmental externalities and the Arrow-Lind public investment theorem. American Economic Review 63(4), 722–725.

Flemming, J. and C. Mayer (1997). The assessment: public-sector investment. Oxford Review of Economic Policy 13(4), 1–11.

International Monetary Fund (2004). Public-private partnerships. Technical report, Wash- ington, DC: IMF.

Gautier, A. and A. Yvrande-Billon (2013). Contract renewal as an incentive device. an application to the French urban public transport sector. Review of Economics and Institutions 4(Winter), Art 2.

Gazley, B., W. K. Chang, and L. B. Bingham (2010). Board diversity, stakeholder rep- resentation, and collaborative performance in community mediation centers. Public Administration Review 70(4), 610–620.

Gerrard, M. (2001). Public-private partnerships. Finance and Development 38(3).

Goldsmith, A. A. (1997). Economic rights and government in developing countries: cross-national evidence on growth and development. Studies in Comparative International Development 32(2), 29–44.

Grimsey, D. and M. K. Lewis (2004). The governance of contractual relationships in public-private partnerships. Journal of Corporate Citizenship 15, 91–109.

Grimsey, D. and M. K. Lewis (2005). The Economics of Public Private Partnerships. Cheltenham, UK; Northampton, MA: Elgar.

Grout, P. A. (1997). The economics of private finance initiatives. Oxford Review of Economic Policy 13(4), 53—66.

Grout, P. A. (2003). Public and private sector discount rates in public-private partnerships. The Economic Journal 113(486), C62–C68.

Grout, P. A. (2005). Value-for-money measurement in public–private partnerships. EIB Papers 10(2), 33–56.

Hammami, M., J.-F. Ruhashyankiko, and E. B. Yehoue (2006). Determinants of public-private partnerships in infrastructure. IMF Working Paper No. 66/99.

Hart, O. (2003). Incomplete contracts and public ownership: Remarks, and an application to public-private partnerships. The Economic Journal 113(486), C69—C76.

Hart, O., A. Shleifer, and R. W. Vishny (1997). The proper scope of government: Theory and an application to prisons. Quarterly Journal of Economics 112(4), 1127–1161.

Hennart, J.-F. (1988). A transaction costs theory of equity joint ventures. Strategic Management Journal 9(4), 361–374.

Hirshleifer, J. (1964). Efficient allocation of capital in an uncertain world. American Economic Review 54(3), 77–85.

Irwin, T. (2008). Controlling spending commitments in PPPs. In G. Schwartz, A. Corbacho, and K. Funke (Eds.), Public Investment and Public–Private Partnerships: Addressing Infrastructure Challenges and Managing Fiscal Risks. Washington, DC: International Monetary Fund.

Jaffee, D. M. and J. M. Quigley (2009). The government sponsored enterprises: Recovering from a failed experiment. Technical report, Institute of Business and Economic Research, Fisher Center for Real Estate and Urban Economics, University of California, Berkeley.

Jevcak, A. and F. Keereman (2008). Challenges for public investment in new EU member states. In G. Schwartz, A. Corbacho, and K. Funke (Eds.), Public Investment and Public-Private Partnerships: Addressing Infrastructure Challenges and Managing Fiscal Risks, pp. 36–60. Washington, DC: International Monetary Fund.

Kay, J. (1993). Efficiency and Private Capital in the Provision of Infrastructure. Paris: OECD.

Klein, M. (1997). The risk premium for evaluating public projects. Oxford Review of Eco- nomic Policy 13(4), 29–42.

Kosar, K. R. (2008). Government-Sponsored Enterprises (GSEs): An Institutional Overview. CRS Report for Congress Order Code RS21663, Congressional Research Service, The Library of Congress.

Laffont, J.-J. and J. Tirole (1993). A Theory of Incentives in Procurement and Regulation. Cambridge, MA: MIT Press.

Lind, R. C. (1982). Discounting for Time and Risk in Energy Policy, Resources for the Future. Baltimore: Johns Hopkins University Press.

Lind, R. C. (1990). Reassessing the government’s discount rate policy in light of new theory and data in a world economy with a high degree of capital mobility. Journal of Environmental Economics and Management 18(2), S8–S28.

Linder, S. H. (1999). Coming to terms with the public-private partnership a grammar of multiple meanings. American Behavioral Scientist 43(1), 35–51.

Moszoro, M. (2005). Partnerstwo publiczno-prywatne w monopolach naturalnych w sferze uzytecznosci publicznej [Public-Private Partnerships in Natural Monopolies in the Utilities Sector]. Szkola Glowna Handlowa w Warszawie: Warsaw, Poland.

Moszoro, M. W. and P. T. Spiller (2014). Third-party opportunism and the theory of public contracts: Operationalization and applications. In E. Brousseau and J.-M. Glachant (Eds.), The Manufacturing of Markets: Legal, Political and Economic Dynamics, Chapter 11, pp. 229–252. Florence: Cambridge University Press.

PricewaterhouseCoopers (2006). Hybrid PPPs: levering EU funds and private capital. In Infrastructure and Government. PPIAF and the World Bank.

Rangan, S., R. Samii, and L. N. Van Wassenhove (2006). Constructive partnerships: When alliances between private firms and public actors can enable creative strategies. Academy of Management Review 31(3), 738–751.

Ruf ́ın, C. and M. Rivera-Santos (2012). Between commonweal and competition under- standing the governance of public–private partnerships. Journal of Management 38 (5), 1634–1654.

Samuelson, P. A. (1964). Principals of efficiency: Discussion. American Economic Re- view 81, 191–209.

Saussier, S., C. Staropoli, and A. Yvrande-Billon (2009). Public-private agreements, institutions, and competition: When economic theory meets facts. Review of Industrial Organization 35(1-2), 1–18.

Schaeffer, P. V. and S. Loveridge (2002). Toward an understanding of types of public-private cooperation. Public Performance & Management Review, 169–189.

Schwartz, G., A. Corbacho, and K. Funke (Eds.) (2008). Public Investment and Public-Private Partnerships: Addressing Infrastructure Challenges and Managing Fiscal Risks. Washington, DC: International Monetary Fund.

Solow, R. M. (1965). Capital Theory and the Rate of Return. Chicago: Rand McNally. Spackman, M. (2004). Time discounting and of the cost of capital in government. Fiscal Studies 25(4), 467–518.

Starr, P. (1988). The meaning of privatization. Yale Law & Policy Review 6(1), 6–41.

Tandberg, E. (2008). Budgeting of public investments. In G. Schwartz, A. Corbacho, and K. Funke (Eds.), Public Investment and Public-Private Partnerships — Addressing Infrastructure Challenges and Managing Fiscal Risks. Washington, DC: International Monetary Fund.

Treasury, H. (2003). The green book – appraisal and evaluation in central government. Technical report, HM Treasury, London.

Vaillancourt-Rosenau, P. (2000). Public-Private Policy Partnerships. The MIT Press.

Vickrey, W. (1964). Principals of efficiency: Discussion. American Economic Review 54, 88–92.

Viscusi, W. K., J. M. Vernon, and J. E. Harrington (2000). Economics of Regulation and Antitrust (3rd ed.). Cambridge, MA: The MIT Press.

Wallace, R. L. and P. E. Junk (1970). Economic inefficiency of small municipal electric generating systems. Land Economics 46(1), 98–104.

Wang, S. and M. D. Bunn (2004). Government/business relationships: Insights into contract implementation. Journal of Public Procurement 4, 84–115.

Ward, S. C. and C. B. Chapman (1995). Risk-management perspective on the project lifecycle. International Journal of Project Management 13(3), 145–149.

Weber, B. and H. W. Alfen (2010). Infrastructure as an asset class: Investment Strategies, Project Finance and PPP. Wiley.

Wright, M. (1987). Government divestments and the regulation of natural monopolies in the UK: The case of British gas. Energy Policy 15(3), 193–216.