A PPP, for brevity, comprises a long-term contractual arrangement between a governmental body (whether an agency at the central level or a local authority) and a private firm. Under this arrangement, the firm is delegated the responsibility of delivering some services, including the provision of any associated infrastructure. This includes several tasks, namely financing the investment as well as building, managing, and maintaining the infrastructure necessary to provide the services. The firm takes the responsibility for accomplishing all these tasks. PPPs are vehicles to enable the use of private capital together with (or in lieu of) public funds, for the realization of public projects. The fact that the private sector does not spontaneously provide these services suggests the need for public interventions of some sort, and this typically has a financial obligation that may not be realized immediately. Thus, the temptation to think of PPPs as kicking the fiscal can down the road is likely to be short-sighted and problematic.
A key feature of PPPs is their potential for generating more efficient project outcomes. Often, private investment is needed to utilize more efficient management practices than are generally possible in the public sector. Indeed, the private sector's greater managerial efficiency can provide a benchmark for improving the management of sectors that might have to largely remain in the public sector. Initially utilized in the transportation, energy, and water sectors, PPPs are currently employed in a significantly larger variety of projects. These include, inter alia, prisons, waste management, schools, hospitals, leisure facilities, and housing.
Despite the widespread utilization of PPPs, the evidence to date on their performance is mixed. In the UK, private finance initiative (PFI) projects have started yielding cost savings relative to traditional procurement arrangements. However, PPPs have failed to deliver the expected benefits, e.g., in specialized IT projects. This suggests that reliance on PPPs is not equally desirable in all sectors and, in particular, that PPPs are not suitable for sectors that evolve very rapidly (Iossa and Martimort 2008). The French experience in the water sector is also not especially positive, and water prices have been found to be higher under PPP arrangements than under traditional procurement arrangements (Saussier 2006). A particular difficulty in most PPPs is that contracts are renegotiated before reaching their agreed termination date. Renegotiation phenomena are pervasive, especially (though not exclusively) in less developed countries (LDCs). A large number of projects were abandoned in the LAC region due to the private (or public) partner's inability to abide by contractual obligations (see, among others, Guasch 2004, and Iossa and Martimort 2008).
Given the evidence, it is now clear that properly structuring PPPs and ensuring that they deliver agreed benefits is a complex task. Most of the difficulties arise due to information asymmetries that make it easy to renege on contracts. Ensuring effective risk sharing, including the provision of public resources as agreed within the requisite timeframe, is critical to ensure effective functioning of PPPs. We also posit the need for third-party arbiters in ensuring that contracts are honoured. Understanding the main features of PPPs as well as the incentives faced by partners in PPP arrangements is necessary to effectively assess ways to minimize the risks and maximize the potential of PPPs. One can then discuss ways to tackle the different incentive issues and identify instruments to ensure effective service delivery.