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The Basic Public Finance of Public-Private Partnerships

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  • Eduardo Engel

    ()
    (Economic Growth Center, Yale University)

  • Ronald Fischer

    ()
    (Universidad de Chile)

  • Alexander Galetovic

    ()
    (Universidad de Los Andes)

Abstract

Public-private partnerships (PPPs) cannot be justified because they free public funds. When PPPs are desirable because the private sector is more efficient, the contract that optimally trades demand risk, user-fee distortions and the opportunity cost of public funds is characterized by a minimum revenue guarantee and a cap on the firm's revenues. Yet income guarantees and revenue sharing arrangements observed in practice differ fundamentally from those suggested by the optimal contract. The optimal contract can be implemented via a competitive auction with realistic informational requirements; and risk allocation under the optimal contract suggests that PPPs are closer to public provision than to privatization.

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Bibliographic Info

Paper provided by Economic Growth Center, Yale University in its series Working Papers with number 957.

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Length: 54 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:egc:wpaper:957

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Keywords: Bundling; cost of public funds; subsidies; minimum revenue guarantees; revenue and profit caps; Demsetz auctions;

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References

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  1. Klein, Michael, 1997. "The Risk Premium for Evaluating Public Projects," Oxford Review of Economic Policy, Oxford University Press, vol. 13(4), pages 29-42, Winter.
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  6. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2003. "Privatizing Highways in Latin America: Fixing What Went Wrong," Journal of LACEA Economia, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
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  12. Dewatripont, Mathias & Legros, Patrick, 2005. "Public-private partnerships: contract design and risk transfer," EIB Papers 5/2005, European Investment Bank, Economics Department.
  13. Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 393-411, March.
  14. Brealey, R A & Cooper, I A & Habib, M A, 1997. "Investment Appraisal in the Public Sector," Oxford Review of Economic Policy, Oxford University Press, vol. 13(4), pages 12-28, Winter.
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