PPPs are the cooperation between government and business agents that agree to work together to reach a common goal or carry out a specific task, while jointly assuming risks and responsibilities, and sharing resources and competencies. PPPs may involve services and management contracts, leases, build-operate-transfer, concessions, and joint ventures. This chapter focuses on the last three types of PPPs to be consistent with definitions used by the Asian Development Bank and other multilateral agencies.
Time inconsistency-whereby a decision-maker's preference at one point in time is inconsistent with the preference at another point in time-is a major problem for regulating PPPs in infrastructure services. In infrastructure PPPs, time inconsistencies between current needs and future imperatives, and between promises and actions, are commonplace and, to some extent, predictable. For example, a government faced with limited public resources might feel compelled to agree to a postprivatization water tariff increase to attract private investment. But there is a danger that, once a private partner invests in infrastructure services, the government may renege on its commitment to increase tariffs if it is under strong political pressure to do so. And private sector players, for their part, may behave opportunistically. For example, if a private partner knows the government will have to renegotiate a PPP contract once the project is in operation, that partner may bid aggressively to win contracts to increase profits through subsequent renegotiation. Regulation can play an important role in dealing with time-inconsistency problems, as these examples show.