The Basic Public Finance of Public-Private Partnerships

Eduardo Engel, Ronald Fischer and Alexander Galetovic

No 1618, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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.

Keywords: Bundling; Cost of public funds; Demsetz auction; Minimum revenue guarantees; Privatization; Revenue and profit caps; Scope of government; Subsidies (search for similar items in EconPapers)
JEL-codes: H21 H54 L51 R42 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-07, Revised 2011-01
New Economics Papers: this item is included in nep-pbe and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: THE BASIC PUBLIC FINANCE OF PUBLIC–PRIVATE PARTNERSHIPS (2013)
Working Paper: The Basic Public Finance of Public-Private Partnerships (2008)
Working Paper: The Basic Public Finance of Public-Private Partnerships (2007)
Working Paper: The Basic Public Finance of Public-Private Partnerships (2007)
Working Paper: The Basic Public Finance of Public-Private Partnerships (2007)
Working Paper: The Basic Public Finance of Public-Private Partnerships (2007)
Working Paper: The Basic Public Finance of Public-Private Partnerships (2007)
Working Paper: The Basic Public Finance of Public-Private Partnerships (2007)
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