This sin is bound to be committed if sin #1 is also committed. However, even if government guarantees are partial, fairly priced, and adequately booked and disclosed, a sound PPP policy should involve conscious efforts by the government to take advantage of market tests. For example, provided that private players have sufficient skin-in-the-game, governments can and should leverage on the private sector comparative advantages in screening and monitoring projects. By not seizing this type of market test, the scope for projects with low private (let alone social) rates of return grows wider. Missing market tests is more likely to happen where PPP-based projects are financed largely by government-owned (commercial or development) banks.
True market tests arise only if there is sufficient skin-in-the-game of well-informed, sophisticated private investors. For instance, the infrastructure bond market is suitable for qualified investors, and the provision of insurance against, say, construction risks, is suitable only to well-run insurance firms. This implies that involving at the margin only small, unsophisticated investors does not offer a true market test and may instead widen the scope for abuse of small, unsophisticated investors by sophisticated brokerage institutions. It also implies, unfortunately, that true market tests are in relatively short supply in underdeveloped financial systems.