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Editorial
10/2006 |
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Not to be taken for granted
The terms “state failure” and “market failure” stand for real phenomena – and serve as cornerstones for conflicting economic policies. Government bureaucracies tend to be inflexible and sluggish indeed. They do not match the dynamism of the private sector. On the other hand, markets do not always ensure optimal allocation of resources. The capital wiped out by the deflation of the stockmarket bubble earlier this decade could, no doubt, have been better invested – from both an economics point of view and a business one.
We know that neither state hierarchy nor market competition are optimal tools for addressing all societal issues. Public-private partnerships (PPP) are thus supposed to harness the strengths of both, based on formal agreements between actors from government and business on joint action. In view of massive global challenges, which make better societal governance imperative, this approach looks attractive.
For good reason, PPP is arousing much international interest. Euphoria, however, is not warranted. Private-sector enterprises, by definition, are not charitable institutions. It is well-understood that the efficiency of markets stems from their profit motive. Companies do not plug holes in public coffers voluntarily; if that were the case, they would not lobby for lower taxes. And, as every student of public finance learns in the first year, there is the risk of companies free-riding, pocketing subsidies for things they would have done anyway.
That is not to say there is no realistic base for PPPs. Companies with good reputations and motivated workforces enjoy competitive advantages. PPPs can contribute to both. Moreover, enlightened executives understand that stable, predictable living conditions are good for business. Accordingly, PPPs flower particularly well in certain fields, such as those of disaster relief, or of defining environmental and social standards. In these areas, it is easy to see where public and private interests converge.
Of course, real life is more complex than are political slogans. It is remarkable that a statist country like France, of all places, has been allowing profit-driven companies to provide the nation with water for ages – and quite successfully so. Generally much more market-orientated Britain, on the other hand, did not succeed convincingly in privatising the water sector. These two examples illustrate that there are no simple solutions to multi-faceted challenges. For PPPs to work out well, there needs to be a balance of power between the public and private sector. That balance cannot be taken for granted. Financially weak states are presumably not in a particularly strong bargaining position in negotiations with well-heeled corporate groups – and even the governments of the biggest rich economies are plagued with budget problems today. On the other hand, managers of ailing companies will be particularly keen to exploit free-riding opportunities, in order to minimise costs at zero expense. It is probably necessary to scrutinise the merit of PPP proposals case by case.
Where people cannot rely on public services, however, they deserve at least some choice. In India’s urban agglomerations, slum dwellers are increasingly prepared to pay private providers for teaching their children, simply because public-sector schools are not doing their job. And yes, sometimes, experience proves theory-inspired skepticism wrong. But we cannot rely on that to happen all the time. Whoever banks on PPP, therefore, should make sure that a capable state is supervising all arrangements. PPP, after all, depends on the public as well as the private sector.
Dr. Hans Dembowski
Editor in Chief of D+C Development and Cooperation/E+Z Entwicklung und Zusammenarbeit
euz.editor@fsd.de
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