There is an increasing interest in public-private partnerships (PPPs) around the world.2 In a typical (original) (raw)

2006

Public-private partnerships (PPPs) have become increasingly popular in recent years. We show that for these arrangements to be desirable from a public finance point of view, private firmsmust be productivelymore efficient than the public sector. In particular, PPPs are not a means to save on distortionary taxation. We also characterize the contract that trades off optimally demand risk, user-fee distortions and the opportu-nity cost of public funds, under the assumption that the private sector is more efficient. The private firm is fully insured against demand risk in the case of large and small projects, but bears risk for projects of intermediate size. For small projects, no subsidies are required and the optimal contract length is demand contingent. By con-trast, demand contingent subsidies are handed out in every state of demand for large projects and the contract lasts indefinitely. For projects of intermediate size the optimal contract involves a “minimum income guarantee” and...

The Optimality of Public- Private Partnerships Under Financial and Fiscal Constraints

2021

The government may delegate two sequential tasks (e.g., building and operating an infrastructure) to the same or different agents (i.e., partnership versus sequential contracts). Agents are risk-neutral but face financial constraints, whereas the government’s contractual capacity may be limited by the renegotiation-proof and fiscal constraints. By relying on history-dependent incentives, the partnership contract corrects moral hazard more effectively than sequential contracts. Thus, it is socially preferred unless bundling different tasks deteriorates the agent’s financial conditions. Our results shed new light on the role of firms’ financial and government’s fiscal conditions in driving the cost-benefit analysis of public-private partnerships.

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Optimal incentives to early exercise of public-private partnership investments under constrained growth

This paper analyzes how certain incentives given to private concessionaires, in public-private partnerships, should be optimally determined to promote immediate investment, in a real options framework. Our model extends previous real options models, by considering that investment cost is lower than the project value only up to a certain demand level. This constrained growth model, while having the same trigger value, that induces investment, when it occurs before the maximum growth level, shows that investment may only be optimal after demand is above that level. We show how investment subsidies, revenue subsidies and a minimum demand guaranty should be optimally arranged to make the option to defer worthless. These three types of incentives produce significantly different results when we compare the value of the project after the incentive is established and the moment when the related cash flows occur.

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The economic or infrastructure finance: Public-Private Partnership versus public provision

2010

We examine the economics of infrastructure finance, focusing on public provision and Public-Private Partnerships (PPPs). We show that project finance is appropriate for PPP projects, because there are few economies of scope and because assets are project specific. Furthermore, we suggest that the higher cost of finance of PPPs is not an argument in favour of public provision, since it appears to reflect the combination of deficient contract design and the cost-cutting incentives embedded in PPPs. Thus, in the case of a correctly designed PPP contract, the higher cost of capital may be the price to pay for the efficiency advantages of PPPs. We also examine the role of government activities in PPP financing (e.g. revenue guarantees, renegotiations) and their consequences. Finally, we discuss how to include PPPs revenue guarantees and the results of PPP contract negotiation in the government balance sheet.

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