The Basic Public Finance of Public-Private Partnerships
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Public-private partnerships (PPPs) have been justiﬁed because they release public funds or save on distortionary taxes. However, the resources saved by a government that does not ﬁnance the upfront investment are oﬀset by giving up future revenue flows to the concessionaire. If a PPP can be justiﬁed on eﬀiciency grounds, the PPP contract that optimally balances demand risk, userfee distortions and the opportunity cost of public funds has a minimum revenue guarantee and a revenue cap. The optimal contract can be implemented via a competitive auction with reasonable informational requirements. The optimal revenue guarantees, revenue sharing agreements and auction mechanisms are diﬀerent from those observed in the real world. In particular, the optimal contract duration is shorter in demand states where the revenue cap binds. These results also have implications for budgetary accounting of PPPs, as they show that their ﬁscal impact resembles that of public provision, rather than privatization.
Engel, Eduardo; Fischer, Ronald; and Galetovic, Alexander, "The Basic Public Finance of Public-Private Partnerships" (2007). Cowles Foundation Discussion Papers. 1915.