The conditions of efficiency of a PPP for public finances

Public authorities seem increasingly to be involving the private sector in financing, building and operating new infrastructures. A lot of reasons are usually given to justify this private sector involvement but the reasons which are the most frequently mentioned relate to the ability of a private operator to manage the construction and operation of the project more efficiently. This amounts to assuming that the Internal Rate of Return (IRR) of the project is not the same depending on whether it is managed by an administration or public body or by a company which in theory keeps abreast of the progress in optimization techniques which is taking place all the time. This difference is explained in many ways: the private sector pays some categories of staff less well, is more flexible, offers faster construction times which speed up the return on investment and is also more able to resist political demands which generate additional costs. Nevertheless, with a public or a private operator, there is a target IRR, very near the standard notion of Weighted Average Capital Cost (WACC), which is larger in the case of the private alternative because this cost must also include the operator's profit. Thus, if the main stake for the national government relates, for each project of public infrastructure, to the need of subsidies, the fundamental issue is the result of two opposite effects: on one hand the effect of a bigger efficiency of the private operator, on the other hand the effect of a lower WACC for the public operator. The objective of this communication is to propose a modelling of the determination of the need of public financing which formalizes these two effects and allows analyzing the conditions under which the PPP would be advantageous for the public finances. We propose for that a model of the mechanism of financing of the projects with a restricted number of parameters. This modelling will be confronted with real French cases of projects of toll highways in order to verify the relevance of the model and to determine the actual range of these parameters and their dispersal. An analysis will finally be proposed, according to the intrinsic profitability of the projects, the conditions under which a PPP can relieve the public spending. This conclusion joins many other authors in arguing against a systematic choice of one or other solution and suggesting rather that the most appropriate solution will depend on the circumstances of each case. The original contribution of this communication consists of an original formalization and of econometric estimations of these circumstances.