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8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
http://slidepdf.com/reader/full/engel-ppt-2014-the-economics-of-publicprivate-partnerships 1/51
Motivation Highways Problems Promises Experience How Taking Stock
The Economics of Public-Private Partnerships
Eduardo Engel
Universidad de Chile and Yale University
ESNIE 2014Cargese, France
May 20, 2014
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Motivation Highways Problems Promises Experience How Taking Stock
The Topic
The topic:• public-private partnerships in infrastructure
It is about providing public infrastructure:
• long-lasting and irreversible investment used to provide a publicservice
PPP projects:
• highways, bridges, seaports, airports, water and sewer plants,hospitals, jails, schools, sports stadiums
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Motivation Highways Problems Promises Experience How Taking Stock
Options for infrastructure provision
Three organizational forms:
• public ≡ traditional
• privatization
• public-private partnerships (PPPs) ≡
concession
Generally private firms
Differences in:
• incentives• political economy
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Motivation Highways Problems Promises Experience How Taking Stock
Contracting under public provision
Government:
• directly finances the project with public debt
• hires one firm to build the project
• hires another firm for operations and management (O&M)
4
h bl k k
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Motivation Highways Problems Promises Experience How Taking Stock
Contracting under a PPP
• Bundling: same firm finances, builds and operates the project
• stand-alone private firm ≡ SPV ≡ concessionaire
• Compensation of concessionaire:
• user fees: high demand tollroad
• government transfers: school or hospital under availability contract
•
a combination: low demand tollroad
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M i i Hi h P bl P i E i H T ki S k
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Motivation Highways Problems Promises Experience How Taking Stock
Contracting under public provision
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M ti ti Hi h P bl P i E i H T ki St k
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Motivation Highways Problems Promises Experience How Taking Stock
Contracting under PPP
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Motivation Highways Problems Promises Experience How Taking Stock
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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Motivation Highways Problems Promises Experience How Taking Stock
Inv. in PPPs: low-middle inc. ctries. 1990–2011
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20100
20
40
60
80
100
120
140
160
180
Year
P P P i n v e s t m e n t c o m m i t m e n t s ( b
i l l i o n U S d o l l a r s )
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
Investment in PPPs: Europe 1990–2011
1990 1995 2000 2005 20100
5
10
15
20
25
30
Year (financial closure)
P P P i n v e s t m e n t ( b i l l i o n e u r o s )
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Motivation Highways Problems Promises Experience How Taking Stock
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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Motivation Highways Problems Promises Experience How Taking Stock
Motivation
• 25 years of (the most recent wave of) PPPs:
• mixed reviews• time to take stock
• Arguments in favor of PPPs:
• invalid• valid
• Arguments in favor of public provision:
• invalid• valid
• Magnitudes?
• Taking stock:
• PPPs: when and how
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Motivation Highways Problems Promises Experience How Taking Stock
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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g y p g
A Summary of
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g y p g
Motivation
Highways
Problems
Promises
Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
Highways
Problems
Promises
Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
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Promises
Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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Physical Characteristics of Highways
• Investments:
• large, sunk upfront, long lived asset• usually a natural monopoly (interurban) or part of a network (urban)
•
Operation:• excludable, rival (congestion an issue)
• Deterioration (and therefore maintenance):
• highly nonlinear in axle weight• proportional to usage• apparent long after it is optimal to restore the road
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Motivation Highways Problems Promises Experience How Taking Stock
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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Physical Characteristics of Highways
• Quality of service and state of road are contractible:
• state of road can be verified by independent parties• can measure quality of service (e.g.: time needed to remove broken
cars)
•
Demand:• high uncertainty, most exogenous• example: Dulles Greenway
• Why public intervention?
• network planning• intensive use of public space and rights-of-way• monopoly requires toll regulation
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
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Problems
Promises
Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
Highways
Problems
Promises
Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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Problems of Public Provision
Poor choice of projects
• Brazil, 1979–1984
• built 6,000 kms of new roads ... while 8,000 kms of existing roadswent from fair or good to bad quality
Weak enforcement that projects fulfill service obligations• insufficient and untimely maintenance ... too little, too late
• three times the cost
• lower quality of service on average
Excessive cost of projects chosen
• cost overruns
• delays
• capture and corruption
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
Highways
Problems
Promises
Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
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Problems
Promises
Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
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Promises of PPPs
1. Relieve strained budgets
• obviously not true if financed via government transfers
• also not true when financed via user fees
2. Efficiency gains:
• ∼advantages of bundling ... when service contractible
•
incentives for appropriate maintenance
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Motivation Highways Problems Promises Experience How Taking Stock
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Promises of PPPs
3. Introduce competition
• Chadwick vs. Williamson
4. Charging appropriate user fees
• Indiana Toll Road example
5. Filter white elephants
• market test ... if financed via user fees and no governmentguarantees
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Motivation Highways Problems Promises Experience How Taking Stock
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Promises of PPPs: Summary
1. ×Relieve strained budgets
2. ∼Efficiency gains:
3. ∼Introduce competition
4. ∼Charging appropriate user fees
5. ∼Filter white elephants
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Motivation Highways Problems Promises Experience How Taking Stock
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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Adam Smith and White Elephants
“When high roads are made and supported by the commerce that is carried on
by means of them, they can be made only where that commerce requires them.[. . . ] A magnificent road cannot be made merely because it happens to lead to
the country villa of the intendant of the province [. . . ]”
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
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Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
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Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
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Typical contract
• Fixed term: e.g., 30 years
• Firm chosen via competitive auction
• Bidding variable: lowest toll, shortest concession term, highestannual payment to the government (cannon), lowest subsidy
• Minimum income guarantees
• Fiscal accounting: poor or totally absent
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Motivation Highways Problems Promises Experience How Taking Stock
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Governance
• Typically the same agency in charge of planning, adjudicating,monitoring and regulating the concession contracts
• Leads to poor monitoring and lax regulation
• Argentina’s General Comptroller Report of 2003
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Motivation Highways Problems Promises Experience How Taking Stock
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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Soft Budgets
PPPs allow off-budget spending.
Useful for politicians/government.
In the UK, only 23% of capital cost of 599 PFI projects up to April 2009are on balance sheet.
“Cynics suspect that the government remains keen on PFI not because of the efficiency it allegedly offers, but because it allows ministers to perform a useful accounting trick.”
The Economist , July 2nd, 2009.
Despite more stringent accounting standards introduced in April 2009, PFIprojects remain excluded from public sector net debt calculations (NAO, 2011).
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Motivation Highways Problems Promises Experience How Taking Stock
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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Renegotiations and Spending Anticipation
While sometimes necessary, they are problematic
Often lead to additional works unrelated to original project
•
circumventing budgetary controls• paid by future administrations
• Santiago water collectors example
Guasch (2004), Guasch, Laffont and Straub (2007, 2008): analyze1000+ PPPs in Latin America
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Motivation Highways Problems Promises Experience How Taking Stock
ffi f
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Efficiency Costs of Renegotiations
First intuition — no cost:
• more aggressive bids if expect to make money renegotiating
Second intuition — potentially high cost:
•
Adverse selection of inefficient firms good at lobbying• Moral hazard problem: government becomes careless
• Bad project selection: white elephants more likely
•
Lack of competition for additional works may increase costsubstantially
Post-renegotiation contracts not publicly available in most countries(e.g., France).
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Motivation Highways Problems Promises Experience How Taking Stock
E d f Ch l
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Evidence from Chile
• 50 concessions (28 highways)
• 147 significant renegotiations (avge.: every 2.5 years)
• Upfront investment: US$ 8.4 bn
• Renegotiations: US$ 2.8 bn
• How: Bilateral renegotiations: 83% (remainder by arbitration)
• When: 78% during construction phase — incomplete contracts?
• What: 84% involves additional investment
• Who pays: 65% of bilateral paid by future administrations
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
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How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
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How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
H h ld it b d
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How should it be done
1. Avoiding bad faith renegotiations
2. Improving public accounting
3. Improving contract design
Recent reforms of PPP legislations point in this direction.
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Motivation Highways Problems Promises Experience How Taking Stock
H I i f ti ti
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How – Improving governance of renegotiations
Independent specialized agency reviews and approves projects, reducing
space for renegotiations.
Use service and not input standards in the PPP contract.
Additional works should be publicly tendered, if possible.
Independent agency ensures that contract value does not change afterrenegotiation:
The above institutional reforms:
• filter “bad faith” renegotiations
• avoid adverse selection problem
• do not avoid soft budget problem
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Motivation Highways Problems Promises Experience How Taking Stock
Ho Impro ing b dgetary acco nting
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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How – Improving budgetary accounting
No user fees:
Public provision PPPNow: issue 100 in debt “save” 100 in debt
spend 100 in infrastructure spend 100 in infrastructureTomorrow: raise 100 in taxes raise 100 in taxes
pay 100 to private firm
User fees:Public provision PPP
Now: issue 100 in debt “save” 100 in debtspend 100 in infrastructure spend 100 in infrastructure
Tomorrow: collect 100 in tolls relinquish 100 in tolls
Intertemporal budget =⇒ PPP analogous to public provision
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Motivation Highways Problems Promises Experience How Taking Stock
How Improving budgetary accounting
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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How – Improving budgetary accounting
PPP Investments should count as public debt
Also include demand guarantees.
Including future liabilities in current budget not enough:
• increases in investment resulting from renegotiations must affectcurrent budget one-for-one
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Motivation Highways Problems Promises Experience How Taking Stock
How Flexible Term Contracts
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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How – Flexible Term Contracts
Flexible term contracts:
• reduce demand risk (beyond the control of the firm)
• reduces need for guarantees and renegotiations
Particular case — PVR contract:
• government sets user fee and discount rate
• firms bid on present value of toll revenues (PVR)
• contract lasts until winning bid collected
• competitive auction: firms bid on LPVR
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Motivation Highways Problems Promises Experience How Taking Stock
Experience with Flexible Term Contracts: Chile
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Experience with Flexible Term Contracts: Chile
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Motivation Highways Problems Promises Experience How Taking Stock
Experience with Flexible Term Contracts: Chile
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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Experience with Flexible Term Contracts: Chile
Month/year Winning bid Project auctioned (million USD)
Ruta 68 (Stgo-Valparaíso-Viña) 02/1998 513Ruta 160, Coronel-Tres Pinos segment 04/2008 342
Airport access road 07/2008 56Melipilla-Camino de la Fruta connection 08/2008 46Ruta 5, Vallenar-Caldera segment 11/2008 288Ruta 5, Puerto Montt-Pargua 05/2010 31Concepción-Cabrero highway 01/2011 318Alternative access road, Iquique 01/2011 167
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Motivation Highways Problems Promises Experience How Taking Stock
How – Financing
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How Financing
• Project finance commonly used
• Is there a PPP premium?
• PPPs: higher cost of financing than under public provision•
public financing costs don’t incorporate implicit governmentguarantee
• observed PPP premium may reflect faulty contract design: fixedterm vs. flexible term
• incentives may be essential to realize efficiency gains and ofteninvolve larger risk for the firm
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
Highways
Problems
Promises
Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
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Motivation
Highways
Problems
Promises
Experience
How
Taking Stock
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Motivation Highways Problems Promises Experience How Taking Stock
Summary – Conceptual
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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Summary Conceptual
• Incentives and efficiency:
• PPPs closer to privatization
• Public finance – accounting for PPPs:
• PPPs closer to public provision
• Contract design and risk sharing:
• PPPs fundamentally different from privatization and public provision:
can use contract length when allocating risk
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Motivation Highways Problems Promises Experience How Taking Stock
In favor of PPPs
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Suspect:
• Saves public resources
Valid:
• Better and cheaper maintenance
• Filter white elephants
• Easier to collect user fees and reduce distortionary taxes
• Avoid public agencies
Gains can be large: 20 - 50% of upfront investment for three of the above
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Motivation Highways Problems Promises Experience How Taking Stock
In favor of public provision
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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p p
Suspect:
• Lower financing costs
Valid:
• Expropriation risk less important
• Cannot be used to anticipate public spending
• Fewer opportunities to renegotiate
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Motivation Highways Problems Promises Experience How Taking Stock
Conclusion
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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•
Potentially large welfare gains under PPPs for highways
• Three out of four advantages of PPPs rely on user fees being amajor source of revenue for the concessionaire
• Important assumption: quality of service contractible
• Case for PPPs less clear: schools, hospitals
• We now know how to handle the main pitfalls under PPPs
• avoid bad faith renegotiations
• appropriate fiscal accounting
• flexible term contracts
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Motivation Highways Problems Promises Experience How Taking Stock
Table of Contents
8/12/2019 ENGEL Ppt 2014 the Economics of Publicprivate Partnerships
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1. Introduction
2. Country Studies: UK, Chile, US, China
3. Highways
4. Incentives
5. Private Finance
6. Public Finance
7. Renegotiations
8. Governance
9. When and How to Implement PPPs
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