Public—Private Partnerships

TLDR

The rules are grounded in transaction‑cost economics and the comparative transaction costs of alternative infrastructure provision modes. The article sets out eight rules for governments to guide public‑private partnership administration and to avoid high transaction costs and poor outcomes. It applies a positive theory framework that considers the divergent profit‑maximizing goals of private partners and the budgetary and political goals of public partners, and examines how these influence the adoption and outcomes of P3s. The Metronet London Underground P3 case, which went bankrupt in 2007, illustrates many of the theoretical points.

Abstract

This article provides eight rules for government concerning the administration of public—private partnerships (P3s). The basis for these rules draws on transaction cost economics. First, however, the article provides some background on alternative modes for the provision of infrastructure and their associated transactions costs. Second, it outlines a positive theory perspective of P3s that takes into account the divergent goals of the partners in a P3 (the profit maximization goals of private sector participants, and the budgetary and political goals of public sector participants). This section throws light on the adoption and outcomes of P3s. Third, it shows that many aspects of the theory are illustrated in the Metronet (the London Underground P3) case, which went bankrupt in 2007. Finally, the article proposes rules that governments should follow in the P3 process if they wish to avoid high transaction costs and poor P3 outcomes.