The use of PPP's and the profitability rate paradox

Over the past twenty years growth in the use of PPPs for new infrastructures has signalled a significant change which completely redefines the issues of public economics in the field of transport policy. This paper concerns the optimal casting between public sphere and private operators. The analysis is based on relationships linking for each project the subsidy rate, the internal rate of return (IRR) and the additional IRR provided to the operator by subsidies. The need for subsidy appears as an increasing function of this additional IRR. Nevertheless, the gradient of the curve decreases in a marked manner. This concavity has some policy oriented consequences. A paradoxical consequence of the concavity of the subsidy function concerns the choice between public or private operators. Because the private operator's charges include the remuneration of his own capital and therefore allow him to make a profit, the choice of a PPP needs more subsidies if we assume that the Internal Rate of Return (IRR) for the project will be the same for both a public and a private operator. The PPP option is only justified when this assumption is not relevant and under specific conditions. Nevertheless, the additional cost of the private issue is decreasing when the intrinsic profitability rate of the project is itself decreasing. Moreover, when the hypothesis of equal efficiency is removed, i.e. when the private sector is more efficient, the lower the profitability of the project, the stronger the interest for public financing of using a private operator.