Governance of Public–Private Partnerships and Infrastructure Delivery: Case of the Milan, Italy, Metro Line M4

Abstract

This paper addresses issues in the governance of the public–private partnership (PPP) with a review of a recent case: Metro Line M4 in Milan, Italy. The paper discusses how to optimize the use of public grants by channeling some into the equity of the concessionaire. This approach creates a truly public–private special purpose vehicle (SPV) (i.e., concessionaire) that leaves efficiency incentives to the private party but results in greater public control of funding contributions as well as project costs. The paper demonstrates how public-sector involvement in the concessionaire can reduce the information asymmetry between the public and private sectors during project bidding and negotiation: greater public control of a project’s technical and financial information is a crucial factor in the reduction of project costs. Reduction in information asymmetry and the creation of a public–private SPV (concessionaire) establish a double layer of control over a project, which allows for a more efficient monitoring system during the construction and the operation of the project. The paper shows how the City of Milan developed and negotiated the Line M4 project and left little margin for increased costs, yet ensured an adequate return to the private party. This Milan experience provides lessons to improve effective project delivery in infrastructure development: the method used can create an efficient framework to reduce project costs and to discourage opportunistic behavior during project renegotiations. The potential applicability of the Line M4 governance structure to PPP projects elsewhere, including in the United States, is discussed.