Political issues re risks in infrastructure PPPs in Asia

Posted: January 7, 2011 in ASEAN, China, Corruption, Political economy, Public-private partnerships (PPP), Rule of law, Southeast Asia, Tariffs

1. 

Why do countries with less checks and balances also experience greater number of project failures?

In the general political science literature, the notion of checks and balances was considered as a powerful antidote to the abuse of power (i.e., monarchical power).  Concentration of governmental power in one person or a single group more often leads to excess and abuse.  John Locke and the American founding fathers counselled the separation of powers to decrease the likelihood of tyranny.

However if power was too dispersed among so many decision makers, it could result in indecisiveness and the lack of public order (Haggard and McCubbins 2001).

Lesser checks and balances leads to arbitrariness given that only one (or a few) make political (or policy) decisions.  Lesser checks and balances mean a lesser number of veto players.  Fewer veto players may produce decisiveness and policy flexibility (at its best) but also policy volatility at its worst (Tsebelis 1995, 1999, 2000).  An empirical study by Henisz (2004) concludes that the notion that political checks and balances that constrain decision makers’ discretion serve to limit policy volatility and thus encourage investment and economic growth.

A fewer number of veto players may lead to a larger number of project approvals.  However, it could also mean relaxation of due diligence.  When these projects are faced with macroeconomic shocks and other sources of project risk, it is again less difficult for a fewer number of decision makers to declare project failure (tariff freezing, contract renegotiation, etc.).

Another point:  Checks and balances enhances the commitment (makes it more credible) of governments (borrowers) to pay their loans and honour contracts.    

2.
Why is China more prone to freeze tariffs than ASEAN countries?

 

It must be pointed out that China is an economy transitioning from central planning to market capitalism under the auspices of an authoritarian political regime.  For this reason, ubiquitous institutions that we may take for granted in jurisdictions with a dissimilar history such as contracts, private property rights, courts, etc. are not as fully developed in China compared to it Southeast Asian neighbours.

 Specialist literature (e.g. Landry 2008) notes that China is an anomaly—it being designated as a ‘decentralized authoritarian’ polity.  Local governments in China enjoy an unprecedented degree of fiscal autonomy and devolved powers (including the power to sign contracts with private firms).  Other scholars (verify citations) suggest this was the result of a log-rolling bargain between central and local elites in the light of the painful experiences of Mao period (especially the Cultural Revolution).   Empirical literature indicates that failure of most infrastructure PPPs can be traced to the imprudent exuberance of local governments (who are apparently in a race with each other in building infrastructure).  Compounding the situation is the apparent lack of a national PPP template that could guide sub-national actors and private partners. (See Adams et al. 2006; Bellier and Zhou 2003;  Zhong et al. 2008).   

 3.

 Why does ASEAN have better project experiences than China?

 The original ASEAN-5 (Malaysia, Indonesia, Thailand, Philippines and Singapore) has a more extensive experience with private sector-led, mixed-economy capitalism and does not have the historical burden of China’s command economy. Consequently, these countries have comparatively better institutions supportive of infrastructure PPPs. 

 What could be investigated further is whether PPPs in the ASEAN-5 needed the imprimatur of central (or federal) authorities.  I suspect that local governments in ASEAN had lesser leeway compared to their Chinese counterparts in contracting big ticket infrastructure PPPs.  Thus, you had a greater number of veto players in ASEAN which could have resulted in greater pre-operational prudence and a more judicious sharing of project risks among central and local governments with their private partners.

 Size is another point of consideration when we try to explaining differing levels of decentralization and devolution in China and ASEAN.  Chinese local governments (esp. provinces) are equivalent to or larger than most ASEAN nations.   There is thus a greater imperative to decentralize in China than in ASEAN given these size disparities. 

4.

Why are countries with lower (higher) levels of corruption less (more) likely to freeze tariffs?

 Jurisdictions with lower levels of corruption are less likely to freeze tariffs while countries with higher levels of corruption will be more likely to freeze tariffs.  The freezing of tariffs is, among others, an opportunity for state agents to extract side payments from private contractors.  More corrupt agents are then most likely to freeze tariffs in expectation of illicit gain that could arise from tariff unfreezing or contract renegotiation.  

 5.

Why are countries with enhanced rule of law more likely to freeze tariffs?

Kaufmann et al (2009) defines ‘Rule of Law (RL)’ as “capturing perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.”  Intuitively, one should expect that countries with enhanced RL will be less likely to freeze tariffs since the quality of contract enforcement would be high.

This empirical result is indeed a puzzler.

Could this be associated with ‘Voice’?  What were the regression results between Voice and tariff freezing?    I expect that countries with greater voice will be more likely to freeze tariffs as governments will be more responsive to noisy electorates demanding tariff freezes.

_______________________________________

Explanatory note: Together with the earlier blog entry on China, this particular entry is a by-product of my collaboration with Dr. Renato Reside of the UP School of Economics on the structural determinants of risks faced by infrastructure PPPs in Asia.

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Comments
  1. Norene Marta says:

    Thank you very much for the post, I even learned something from it. Incredibly good content on this website. Always looking forward to new article.

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