Comparing Public–Private Partnerships and Traditional Public Procurement: Efficiency vs. Flexibility

Abstract

Public–private partnerships (PPPs) have become an increasingly popular way for governments to procure for their citizens certain public services. Supporters argue that the private sector can provide services more efficiently while critics complain that the long-term contracts involved reduce governments’ ability to adapt to changing needs. This paper shows that the optimal choice between a PPP and traditional public procurement depends on a number of factors, including the likelihood that changes will be necessary, the productivity of non-contractible effort exerted by private sector partners, and the bargaining power of government vis-à-vis private parties. It also shows that this choice may depend on whether the government’s objective is to maximize “value for money” or to maximize total social surplus.