Discussion of Finance and Public-Private Partnerships

Borrowing from existing results, in particular Hart (2003), the authors argue that the benefits of PPPs to society lie only in efficiency gains in production (e.g. bundling and cost-cutting incentives) and allocation (e.g. improvements in the quality and quantity of infrastructure). They conclude that risk transfer to the private sector is most justified when the risk is endogenous (i.e. it is affected by firms’ own actions). When this is the case, welfare can be improved using availability payments or variable-term present-value-of-revenue (PVR) contracts. In contrast, fixed-term, real and shadow-toll contracts will be inefficient under these circumstances. The authors also note that if market imperfections mean that there is a cost of capital ‘premium’ in PPPs, this is not an argument against such contracts as long as it is at least compensated by improved operational efficiency.