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The Basic Public Finance of Public-Private PartnershipsEduardo M. R. A. EngelYale University - Department of Economics; National Bureau of Economic Research (NBER) Ronald D. FischerUniversity of Chile - Center of Applied Economics (CEA) Alexander GaletovicUniversidad de los Andes January 1, 2011 Cowles Foundation Discussion Paper No. 1618 Yale University Economic Growth Center Discussion Paper No. 957 Yale Economics Department Working Paper No. 35 Abstract: 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.
Number of Pages in PDF File: 32 Keywords: Bundling, Cost of public funds, Demsetz auction, Minimum revenue guarantees, Privatization, Revenue and profit caps, Scope of government, Subsidies JEL Classification: H21, H54, L51, R42 working papers seriesDate posted: July 17, 2007 ; Last revised: March 2, 2011Suggested CitationContact Information
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