Ⅲ．“Public Interest”Should Be Considered and Embedded in the PPP Legal System

Some scholars point out that the concept of “public interest”is so abstract that it is meaningless to put the concept into practice, for we lack a technique to accurately define the scope of the public interest.^[1]However, we cannot deny the existence of the public interest．Although the concept of “public interest”is uncertain to some extent, when it is put into a specific context, the ambiguity of the concept may vanish completely.^[2]Against the background of the privatization of public utilities, the public interest which results from the regulation of the public utilities includes the generalization of the public services, the optimization of the overall social interests, and the sustainability of the environmental resources.^[3]Thus, in the application of PPP to the construction of infrastructure and public utilities, we shall concentrate on the features of the “public interest”and pay sufficient attention when we try to balance the public and private interests．The lifecycle of PPP covers many milestones of the project, such as the initiation, preparation, bidding, construction, and operation, among others, almost all of which involve the public interest; moreover, the standard and the depth of consideration for the public interest will vary due to the fact that all projects are different．Therefore, it is difficult to discuss each one individually．In the past, scholars have analyzed the issue of “public interest”mainly from the aspect of the government's administrative privilege: the government is given the rights to unilaterally terminate the contract, to control the price, and to supervise the project quality.^[4]It is true that the administrative privilege is indeed important for the protection of public interests, but it focuses more on the post-protection and external protection of those interests．To better maintain the public interest in PPP projects, we ought to carry out the institutional buildup based on the agreement itself．In accordance with the incomplete contracting theory, the formulation and modification of the agreements, together with the configuration of the residual rights of control, are especially important in the protection of the public interest.

A．“Public Interest”Should Be Protected When the Agreement Is Formulated and Modified

1．Under the incomplete contracting theory, the public interest is challenged by the PPP franchise agreement．The economic life is full of uncertainties．Due to the limited human rationality, contractors cannot accurately foresee the future, nor can they clearly define the rights and obligations of each party under all circumstances．It is impossible and very expensive to write all the details explicitly in the contract．The PPP franchise agreement is characterized by this incompleteness owing to both the long-term partnership and the uncertainty of politics and economics．Its incompleteness may be reflected in each milestone of the project: project choice, implementation, operation, transfer, and so on．In terms of the formulation and modification of the contracts, the following three factors may do harm to the public interest．First, the selection rules tend to break the balance of the public and private interests．In the bidding stage of a PPP project, the traditional procurement procedure and the rules of “low price bidding”are no longer adopted when the government chooses its private partners．The lowest bidder is not always the best choice．The private partner's “best value”is not on the price advantage only; other factors that ensure the needs of the public sector are much more important．In some special circumstances, the private sector's experience and skills in the public field may become the crucial factor to obtain the cooperation opportunity.^[5]For the PPP project, this selection standard is reasonable; in contrast to the traditional objective criterion, however, it is a bit ambiguous．This ambiguity is likely to be used by some private partners for rent-seeking so as to win the bid, which will damage the public interest, for the products they provide are often of high price with low quality．Second, due to the incompleteness of the contracts, after concluding the original contract, the preferred bidders always modify the price of the contract, because the public sector is “locked”by them, which will result in a change of project costs．Research shows that most bidders tend to take advantage of this contractual incompleteness,^[6]and the trick is as follows: for some PPP projects, although the investment returns are low or even unprofitable, the private sector still offers the lowest price in order to win the tender first; then, when the government is under the pressure of project progress, the private sector will “lock”the government, forcing it to modify the contract and increase the favorable clauses on the private sector's side so as to attain the improper profits．Third, in the modification of contracts, due to fact that the public sector is often disadvantaged in access to operational information during a project compared to the private sector, it is likely to be “info-kidnapped”by the private sector．Wrong decisions will be made in the contract modification, and the public interest will be impaired.

The analysis that the public interest in PPP projects is impaired does not remain only on the theoretical level．The case of “Taipei Dome”, which happened in Taiwan recently, aptly illustrates the point．The “Taipei Dome”project was operated in the BOT mode (build-operate-transfer), and it was constructed by the Farglory Land Development Company, a private-sector enterprise．The project was investigated in late 2014 by the Taipei Clean Government Committee, who suspected that the project involved government—business collusion and impaired both the public interest and the public safety．The allegation was focused on the modification of the BOT agreement to favor only Farglory Land Development Company (especially in reducing the royalties to zero^[7])．This case was directly involved with the former Taipei Mayor, Ma Ying-jeou, and the former Taipei Department of Finance commissioner, Lee Sush-der．The controversies were as follows: Is it legitimate to modify the BOT agreement in favor of the private sector? Is it reasonable? Are there any illegal circumstances of benefiting the private sector by giving up the public interest? Although there is no definite conclusion on the case so far,^[8]it has aroused people's extensive concern about the public interest in PPP projects.

2．The mechanism for PPP agreement formulation and modification should be made out of procedural justice．In the case of “Taipei Dome”, the two parties held different opinions as to whether Ma Ying-jeou and Lee Sush-der had illegally deleted the royalty's articles of “Taipei Dome”to favor Farglory Land Development Company．The Taipei Clean Government Committee said the evidence was clear, but Ma Ying-jeou, Lee Sush-der, and Farglory Land Development Company all criticized the allegation as false．This case has gradually evolved into a “Rashomon”.^[9]

The above controversies naturally reflect the defects in the institutions—the procedural mechanism for justice．Relying on a procedural mechanism to ensure the public interest is more practicable than judging whether or not the public and private interests have lost their balance．PPP has closely connected public projects with the marketization, and commercial factors have spread to every stage of the construction and operation of public projects．To judge the gains and losses of commercial interests is full of uncertainty, therefore it is urgent and important to create a scientific procedural mechanism to formulate and modify the PPP franchise agreement．The procedural mechanism is meant to cover two aspects．First, the government should establish a diverse advisory council, staffed by the officials of the government departments that directly relate to the projects, the experienced professional managers, and the accountants, lawyers, and appraisers of the professional service organizations．Such a structure will compensate for the government's disadvantage in market information, so as to ensure the reasonable allocation of rights and obligations and equitable risk-sharing in the PPP franchise agreement by means of analyzing, appraising, and comparing the public and private interests in an integrated way．At present, the systems of “review panel”and “negotiation panel for confirming procurement results”^[10]established in the PPP projects by the Chinese Treasury are meant to achieve the above goals．The positive significance of the two-panel system is not further discussed here, but it is more reasonable to combine the two panels into one for future development．In fact, there is no essential difference in their functions, except in that they enter in the project at different stages．In addition, the two panels mainly function when choosing the private partners and drafting the original contracts;in the future, they are needed when modifying the agreements, as well as during the lifecycle of the project．Second, in determining the formulation and modification of a specific PPP franchise agreement, the essential clauses should be approved by the advisory council．In procedure, the members of the advisory council involved in the decision-making should not share any interest with the specific project, by which they can remain in an independent position as being objective and impartial．The decision-making should be implemented in accordance with a democratic voting system, and each decision should be approved by over half of the members．Meanwhile, each member should take the legal responsibility for his or her vote.

Under the procedural mechanism for justice, if the formulation or the modification of an agreement is suspicious of invading the public interests, a procedural review will be implemented first．If the procedure is legitimate, unless there is a severe imbalance of the public and private interests, there will be no investigation into legal liabilities.

B．The Public Sector Should Hold Control of the Agreement's Residual Rights

1．The government bears the ultimate “assurance liability”for the public interest．In western countries, in the change from traditional liberalism into social welfare states, more and more public services are considered to be the government obligations．With the development of time, however, the western countries have realized that the supply of public services by the country exceeds their power．Thus, German scholars have put forward the concept of “assurance state”．It represents the following: the country gives up its responsibility of directly providing public services, and instead, that responsibility is handed over to the private sector, and fulfilled by the private sector．However, it does not represent the cancellation of state responsibility．In fact, to guarantee that the quality of public services will not be affected by the market players' pursuit of economic profits, the country has to take the related “assurance liability”—i.e., the ultimate responsibility for ensuring the fulfillment of public tasks.^[11]As German scholar Eifert has said, “assurance state”is the country which continually takes the responsibility for the public interest, but ceases to implement the task in person.^[12]Wolfgang Hoffmann Riem terms it the “vicarious liability”.^[13]In brief, to ensure that the implementation of public tasks can achieve the public interest, the country should regulate the act of the private sector's fulfilling the PPP contracts, and in this way, the public services offered by the private sector will not result in deterioration.

2．The residual rights of control should be allocated to the party who takes the ultimate “assurance liability”．The incompleteness of the PPP franchise agreement will result in high costs if the parties attempt to clarify all rights when signing the contract; therefore, it is impossible to formulate a complete contract．Hart and other scholars believe that when the cost of clarifying all the rights is so high that the contract cannot be formulated in a complete way, the ownership is then of significance．This ownership refers to the owning of the residual rights of control．In the case of an incomplete contract, it is more efficient to allocate the residual rights of control to the party who plays a comparatively important role in the decision-making．Thereby, the residual right of control is the key factor in the formulation of a contract．The aim of applying the residual rights of control is to attain the residual rights of claim, and the two rights correspond to each other in terms of the governance．In the PPP projects, the residual rights of control are the power by which the parties attempt to affect and supervise the clauses of the contract so as to attain the residual rights of claim.

In the PPP projects, whether based on the above theory of the “assurance state”, or based on the maintenance of the public interest, the residual rights of control should be allocated to the public sector．The public sector's residual rights of claim represent the public interest actually, which is the “special interest”apart from the profits．In fact, it is the public sector that is responsible for the ultimate result, while the responsibilities of the private sector have been strictly set in the clauses of the contract．Therefore, the government has to take the risks for the things that are not defined in the contract.^[14]In other words, while it is true that the private sector may suffer from some losses in the long-term incomplete contract of the PPP franchise agreement, such as where the cost is increased due to considerations of the public interest, or where a loss is caused by a change in laws and policies, and so on, all such losses can be compensated by government subsidies in accordance with the PPP franchise agreement．In this situation, the government is the ultimate liable party, and by its nature it is impossible for the public sector to evenly share the risks with the private sector．The government is at a disadvantage position when there are risks: under the theory of “assurance state”, the government bears the unavoidably ultimate responsibility for such risks．Accordingly, on the basis of the concept that risks are proportional to the rights of control, it is equitable to allocate the agreement's residual rights of control to the public sector.

[1] See James E．Anderson, Public Policymaking: An Introduction, Houghton Mifflin Company, 2003, p.13.

[2] See Leif Levin, Self-interest and Public Interest in Western Politics, Oxford University Press, 1991, p.23.

[3] See Gao Junjie, Public-interest Orientation of Regulating the Privatized Public Utilities, Modern Law Science, Issue 2, 2014.

[4] See Wang Dong, Government in PPP: Role and Behavior Framework, China Government Procurement, Issue 3, 2015.

[5] See Hasity H.O．Steen, John R．Jenkins, We Build It and They Come! Now What? Public-Private Partnerships in the Replacement Era, 41 Stetson Law Review, 249, 2012.

[6] See Liang Dongling, Hidden Risks of the PPP Project Construction, Doctoral Dissertation of Northeast Forestry University, 2011, p.6.

[7] The investigative report of “Taipei Dome”Case issued by the Taipei Clean Government Committee pointed out, in accordance with the relevant provisions, Farglory Land Development Company should pay the royalties for the use of the land supplied by the government, but in the agreement modified by the Taipei Government and Farglory Land Development Company, the royalties were reduced into zero.

[8] The Taipei Clean Government Committee said that clear evidence proved the fact that Ma Ying-jeou had illegally deleted the royalties of “Taipei Dome”to favor Farglory Land Development Company, they suggested sending Ma Ying-jeou and Lee Sush-der to the ministry of law to be investigated, but the final conclusion has not been made yet．See Ma Ying-jeou Was Accused in the Case of “Taipei Dome”: Political Persecution, http://news.takungpao.com/taiwan/shizheng/2015-05/2994763.html, visited on Oct.1, 2015.

[9] See The Case of “Taipei Dome”Evolved into “Rashomon”, http://www.taiwan.cn/plzhx/hxshp/zhzh/201505/20150511_9770112.htm, visited on Oct.1, 2015.

[10] The Operational Guidance of PPP (Provisional), Article 16 ＆ 20.

[11] See Smit Arsmann, Sequence Construction of Administrative Law within the Concept of Procedure, trans．by Lin Mingqiang, Peking University Press, 2012, p.161.

[12] See Xu Dengke, PPP Institutions Under German Theory of Assurance State—Enlightenments to China, Doctoral Dissertation of Legal Research Center of Taiwan University, 2008, p.36.

[13] See Li Yisuo, Evaluation on the Concept of German Assurance State, Foreign Theoretical Trends, Issue 7, 2012.

[14] See Froud, J., The Private Finance Initiative: Risk, Uncertainty and the State, Accounting, Organizations and Society, 2003, 28(6), p.582．