PPPs potentially provide flexible tools for decision makers to enable efficient infrastructure and/or service delivery. However, a PPP must be designed with attention to the exact context within which it will be implemented for its success. This involves tailoring the partnership to accommodate the main technical characteristics and constraints of the concerned sectors. Conducting such a comprehensive and reliable investigation thus requires an initial sectoral analysis.
We first discuss the characteristics and circumstances that can make PPPs more suitable in certain sectors than in others.22
Bundling. An essential feature of a PPP is that different phases of a project are bundled into a single contractual agreement that concerns design, construction, financing, operation, and maintenance. The various firms that will jointly develop the project form a consortium to establish a special purpose vehicle (SPV), which becomes the private contractual partner. Bundling the project's different phases is useful when governmental bodies are aware of the needs that the project should address, but do not know the best way to do so. This knowledge gap makes it more efficient for them to rely on the private sector for the design and the realization of the whole project. The contract should be designed to provide the private sector with appropriate incentives to find innovative solutions and effectively employ their technical and managerial expertise. The risks of the project must also be efficiently allocated. For instance, the private partner must bear risks associated with the design, construction, and timely delivery, which it can control. If the rewards match the risks, the private partner will have incentives to complete the infrastructure and start providing the service within the stipulated termination date and budget.
Positive externalities between the project phases. When the risks are efficiently allocated between the partners, the very act of bundling project phases may lead to efficiency gains if positive externalities (synergies) are present between the design/construction activities and the management/maintenance activities. For instance, this can occur when the infrastructure's quality-which typically affects the service's quality-decreases management and maintenance costs. As bundling induces the private partner to account for the impact that the quality of the infrastructure has on the management and maintenance costs, it helps mitigate underinvestment problems, which arise whenever some quality aspects cannot be specified in contracts, but can be curbed by the private partner to contain costs. We can thus state that, in general, bundling can lead to significant efficiency gains, and hence is desirable if building infrastructure of a sufficient quality reduces management and maintenance costs. This is the case with hospitals. The quality of both the infrastructure and the medical equipment has an important positive effect on the performance. It is also the case in transportation. Both maintenance costs and user benefits are strictly linked to the quality of transport infrastructure. Prisons are another good example. Improvements in the infrastructure design enable significant reductions in management costs.
Contractual length. The presence of externalities between construction and operation is one reason why PPP arrangements must have a long duration. This core aspect determines how carefully the private partner will account for the effects of the construction investment on the management and maintenance costs. If the contract's duration is too short, the private partner will not have the incentive to internalize those effects and consequently under invests. On the other hand, it may not be a good idea to lengthen the duration excessively for two possible reasons. First, the prolonged absence of any competitive pressure may lead the private partner to become inefficient. Second, when the users' preferences evolve quickly over time, the contractual terms tend to rapidly become obsolete. This may require renegotiation of the contract. Therefore, PPP arrangements may not be suitable in sectors in which the users' preferences evolve quickly. Similar difficulties have been experienced with the IT services in the UK.
Absence of positive externalities between project phases. Bundling is of little-or no-use when there are limited or no positive externalities between construction and operation activities. This is the case, for instance, with the so-called soft services, such as meal preparation and distribution, cleaning, laundry, maintenance of buildings and technological services, parking, and so on. In the UK, these services, initially embodied in PPP arrangements, are currently regulated under independent contracts. Frequently, these contracts are relatively short-term to encourage participation by a larger number of firms. Finally, negative externalities may arise between project phases, e.g., when building high quality infrastructure increases management and maintenance costs, even if it generates larger social benefits. A good example is found in the security dimensions of the plants. It is, then, not advisable to induce the private partner to internalize these externalities because that would exacerbate the problem of underinvestment in quality/ security. Unbundling may thus be optimal.
We now more closely examine PPP arrangements in the provision of three services of general interest, namely transport, energy, and telecommunications. Without the ambition of being exhaustive, we shall focus on a fewaspects thatseem to be especially important in those sectors.