A Critical Look at Public Private Partnership

Abstract

Potentially, public-private partnership (PPP) can significantly improve economic efficiency by combining the strengths of the public sector and the private sector. On the other hand, poorly designed PPPs may allow private partners to make excessive profits without making meaningful contributions. This paper takes a systematic approach to analyze the PPP structures of federal credit and insurance programs and to evaluate claims made by advocates of infrastructure PPPs. It decomposes the implementation process of a program or a project by functions, analyzes the relative strengths of the public sector and the private sector in each function, and ascertains whether the PPP assigns each function to the right sector with proper incentives to materialize its strength. Many PPPs are poorly designed. In many cases, some functions are assigned to the sector with the relative weakness. In particular, it can rarely be justified to assign the financing function to the private sector. Even when a PPP correctly assigns some functions to the private partner, it oftentimes fails to incentivize the private partner to materialize its strength. Advocates of infrastructure PPPs cite efficiency gains from bundling and risk transfer to the private sector as justifications for transferring the financing function to private partners. Their claims are mostly rhetoric lacking a systematic analysis. In most cases, PPP seems to be a costly way to bypass budget constraints.

Keywords: public-private partnership, risk transfer, credit and insurance, infrastructure

JEL Classification: H43, H81, L14, L90