COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1618 The Basic Public Finance of Public-Private Partnerships Eduardo Engel, Ronald Fischer and Alexander Galetovic July 2007 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. |
