The Seven Sins of Flawed Public-Private Partnerships
There are three stakeholders in a public-private partnership (PPP), (a) the government in office, (b) private firms (financial and non-financial) and investors (individual and institutional), and (c) final beneficiaries (taxpayers or users, present and future). The raison detre of PPPs is threefold: (i) to crowd in private firms and investors into projects that they will otherwise not undertake; (ii) to transfer to the private sector a significant part of the risks and costs that the government would otherwise fully absorb; and (iii) to ensure that the projects efficiency/quality is at least equal to that obtained if the government alone carried all costs and risks. Important (yet often ignored) implications follow. First, outsourcing (e.g., construction and maintenance) to the private sector does not by itself constitute a PPP if all risks and costs are, in one way or another, still borne by the government. Second, a PPP does not reduce total risk; it simply distributes it differently, involving private sector firms and investors. Third, the total costs borne by the final beneficiaries would be lower under a PPP (compared to a project whose costs and risks rest completely in the governments balance sheet) only if the PPP achieves efficiency gains; otherwise, what beneficiaries save in taxes they will pay in user fees, although, under a PPP, more of the costs would be assigned to direct beneficiaries/users, than to taxpayers at large. Fourth, that a PPP can provide (cash) budget relief may be a welcome corollary for the government in office but it is not a core objective of a PPP.
Summary: | There are three stakeholders in a
public-private partnership (PPP), (a) the government in
office, (b) private firms (financial and non-financial) and
investors (individual and institutional), and (c) final
beneficiaries (taxpayers or users, present and future). The
raison detre of PPPs is threefold: (i) to crowd in private
firms and investors into projects that they will otherwise
not undertake; (ii) to transfer to the private sector a
significant part of the risks and costs that the government
would otherwise fully absorb; and (iii) to ensure that the
projects efficiency/quality is at least equal to that
obtained if the government alone carried all costs and
risks. Important (yet often ignored) implications follow.
First, outsourcing (e.g., construction and maintenance) to
the private sector does not by itself constitute a PPP if
all risks and costs are, in one way or another, still borne
by the government. Second, a PPP does not reduce total risk;
it simply distributes it differently, involving private
sector firms and investors. Third, the total costs borne by
the final beneficiaries would be lower under a PPP (compared
to a project whose costs and risks rest completely in the
governments balance sheet) only if the PPP achieves
efficiency gains; otherwise, what beneficiaries save in
taxes they will pay in user fees, although, under a PPP,
more of the costs would be assigned to direct
beneficiaries/users, than to taxpayers at large. Fourth,
that a PPP can provide (cash) budget relief may be a welcome
corollary for the government in office but it is not a core
objective of a PPP. |
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