PPP Financing in the Road Sector: A Disequilibrium Analysis Based on the Monetary Circuit

Abstract

This paper discusses public and private financing of infrastructure against the background of monetary equilibria, where money is not neutral and financing has an impact on allocation through distribution. These correspond to “disequilibrium positions” in the neoclassical barter equilibrium, as they violate some of its optimality conditions. In these contexts, evaluating welfare before and after the realisation of a project implies a comparison between two suboptimal positions. Such a comparison reveals that, contrary to a widely held view, there are not many rational arguments that may lead to prefer private financing to public financing of road infrastructure, particularly where local incomes are low. Post Keynesian analysis in general and its monetary variant of the circuit, are useful tools for the analysis of public investment policies in such a disequilibrium context. In particular, some features of the monetary circuit approach are well suited to address the economic problems raised by the analysis of public private partnerships (PPP), notably: (a) the integration of the banking sector and the recognition of its role in monetary creation by the private sector; (b) the monetary creation by the State within a macroeconomic framework fully integrating public finance; and, (c) the necessary link between uncertainty and disequilibrium. Combined with a partial equilibrium analysis based on realistic microeconomic configurations of costs and transport demand parameters, the analysis of the circuit highlights that PPP in the road sector do not add anything to the level of effective demand, being in fact the other flip of the coin of restrictive budgetary policies. PPP play a role in mobilizing part of the accumulated savings that the State is forbidden to attract directly because of debt ceilings. They have a softening effect on the Government budgetary constraints similar to those that could be reached if the Government was allowed to accrue investment like the private sector, but are a less transparent solution, because the relevant debt is not necessarily recognized in the balance sheet that services it.