Sustaining Public-Private Partnerships

Abstract

Public-private partnerships provide great opportunities for managing particular types of issues. In situations where the quality, quantity and price of the good or services being provided continue to increase over time, they are likely to be highly effective. While it is important that agreements be structured in ways that maintain competition and protect firms from renationalization for profit, such agreements are generally sustainable and beneficial for all parties. This success cannot, however, be generalized to all types of PPPs. When improvements in the quality or quantity of a good or service are limited, then private sector partners run the risk of obsolescence bargaining and are prone to generating over-priced and elite-focused consumer products. When minimal levels of a good or service must be provided and prices are constrained, then the government runs the risk of private sector partners underproviding the quality or quantity, in turn leaving the government stuck with providing side payments, subsidization or renationalization. Worst of all, perhaps, is the situation of environmental goods and other services that are valued for their existence benefits. In such circumstances, both the private and public partners have an incentive to underprovide the resource because their constituents or customers will continue to pay for the good or service over time. Indeed, these constituents will pay more over time if the good or service is underprovided.

Caveat Emptor: The benefits and risks of public private partnerships will shift among the private sector partner, the public sector partner, and the public at large depending on changes in price and value over time. Public private partnerships work best for services that are commercially viable. They work less well when providing social or environmental goods. When existence benefits are at stake, PPPs are at their worst. In such circumstances, PPPs will likely continue to provide benefits their public and private partners while underserving the public at large.

Keywords: public private partnerships, environment, investment

JEL Classification: H40, H42