An Economic Framework for Comparing Public-Private Partnerships and Conventional Procurement

Private partnership (PPP) can be complex and difficult to structure. Indeed, partly reflecting these challenges, experience with PPPs in the United States is limited, which may be self-reinforcing by deterring public sponsors not familiar with PPPs from ever considering one to procure infrastructure assets.This discussion paper aims to demystify infrastructure PPPs by explicitly describing the conditions under which a PPP can be a better choice for procurement over conventional methods from the perspective of how economists typically look at these issues. No single factor definitively informs whether a PPP is likely to yield higher benefits to society and the taxpayer than conventional procurement. Instead, a balance of elements – the project’s characteristics, the economic environment in which the project is being developed, and the ability of the project sponsor to take certain actions – jointly determines whether a PPP’s delivery and operation of the project is mutually beneficial to both the public and private sectors.This paper also describes important steps for a government sponsor to take before a project being procured through a PPP is started. An essential prerequisite to achieving the potential net benefits of a PPP is for the government sponsor’s to fully understand the project’s characteristics and economic environment before initiating the procurement. In addition, successful PPP implementation requires executing a set of complementary best practices before the project gets underway. Not taking these steps may lead to higher costs, failure to meet performance targets later in the project’s life cycle, and a misallocation of scarce public resources.