Public-Private Partnerships: Some Lessons After 30 Years: The savings policymakers usually claim for these projects are illusory, but well-designed contracts can deliver public benefits.

• Author: Engel, Eduardo
• Position: TRANSPORTATION

Public-private partnerships (PPPs, also known as P3s and concessions) emerged in recent decades as a new organizational form to provide public transport infrastructure. Around the world, traditional provision continues to be the dominant procurement option, but investment in PPPs over the last 30 years has been substantial, adding 203 billion [euro] of infrastructure spending in Europe and $535 billion of spending in developing countries. Most investments are in roads, seaports, and airports, but in some countries investment via PPPs has been significant in other types of infrastructure, such as hospitals and schools. In comparison, PPP investments in the United States have been small.

The post-COVID-19 world will probably bring a renewed impetus to PPPs, and it is possible that the United States will jump on the bandwagon. The reason is that infrastructure spending is seen as a lever to a faster recovery, but fiscal budgets will be tight, and governments will have accumulated large debt burdens. Politicians will likely argue that PPPs allow them to increase spending without using scarce tax dollars or incurring additional debt.

This argument is flawed. In the absence of efficiency gains, the present value of the fiscal effect of a PPP project is the same as with traditional provision of the same project. Consequently, PPPs do not free up government resources in any meaningful sense. Below, we explain the logic of this equivalence result.

This implies that the choice of infrastructure provision via PPPs should be made only if they are more efficient than traditional provision. We argue that experience has shown that the main efficiency gains of PPPs are improved life-cycle maintenance and earlier completion of projects. Those benefits can be substantial.

However, PPPs are routinely renegotiated, and this undermines their potential efficiency gains. The prevalence of renegotiations suggests they are not accidents, but an equilibrium outcome of the incentive structure within the infrastructure project environment. In fact, the evidence indicates that renegotiations are sometimes due to poor project and contract design, and other times to opportunistic behavior by firms.

Finally many PPPs are funded with user fees. This can be efficient, but when PPP contracts have a fixed term, concessionaires are subject to excessive demand risk, which is largely beyond their control. Indeed, exogenous demand risk in transport projects promises to be even larger in a post-COVID-19 world in which new mobility patterns will emerge, driven by significant technological change and also by behavioral changes in social interactions and mobility. A present-value-of-revenue (PVR) contract, in which the PPP contract lasts until the concessionaire collects its bid in the auction, significantly reduces the risk borne by the concessionaire and the likelihood of contract renegotiations. We present novel evidence from Chile that shows that PVR contracts are renegotiated significantly less than fixed-term concessions. In the remainder of this article we examine these issues.

A FISCAL ILLUSION

PPPs are funded by a combination of user fees and government transfers. For example, when demand is sufficiently high, a road can be funded entirely with tolls, while government transfers are usually the main funding source for schools and hospitals. Under a Build-Operate-Transfer PPP contract, the firm finances, builds, operates, and maintains the project. The duration of the contracts is long because the firm needs to recoup the capital costs of the project; it usually lasts 20-40 years in the case of a highway. The facility reverts to the government when the concession ends. At that point, the government can initiate a new concession, request additional investments to revamp the existing infrastructure, or take over the project.

The fact that the project is financed by the concessionaire has made PPPs attractive to policymakers and politicians because they can argue that PPPs relax current fiscal constraints. The government can thus seemingly build infrastructure without an increase in government debt or raising taxes. However, this is an illusion.

Table 1 explains why. It compares the intertemporal budgetary effect of traditional provision and a PPP when the infrastructure is funded by government transfers, as is common in school or hospital PPPs. Assume the project costs 100 units to construct. As the first line shows, a PPP "saves" 100 in current spending and debt, but ultimately taxpayers will pay 100 to fund the infrastructure, just as in a traditional project. The only difference is that under traditional provision, future governments use revenue from taxes to pay bondholders. In contrast, with a PPP they use tax revenues to pay the concessionaire.

Table 2 shows that the same reasoning applies for PPPs funded with user fees. Once again, the government apparently "saves" 100 in current spending and debt. Moreover, it does not need to raise any taxes. Nevertheless, relative to conventional provision, it relinquishes the 100 in user fee revenue it would have obtained from users, which the concessionaire uses to pay off the investment. Because the highway is paid for with user fee revenue in both cases, the fiscal effect is identical.

The illusion stems from the fact that fiscal accounting rules seldom use the appropriate convention in the case of investments in PPPs. The rules do not indicate an implicit increase in net government borrowing, which the government will pay off in the future. Thus, governments can evade conventional fiscal...