Private firms, public entities, and microeconomic incentives

Abstract

PurposePublic private partnerships (PPPs) centralize decision making into a hybrid type of firm, consisting of a government entity with a private firm, that is either a profit‐seeking or non‐profit entity, that initiates, constructs, maintains, or provides a service. The PPP model recognizes that both the public and the private sectors have certain comparative advantages in the performance of specific tasks. PPPs, grounded in cost/benefit analysis, have been used in Australia for decades and are presently being introduced in the USA as a form of innovate contracting. This paper aims to evaluate PPPs as a potentially transferable model for the delivery of public services. PPP firms are evaluated in terms of capital asset management, productive and allocative efficiency, transfer of risk between the public and private sectors, rights to the residual, and the public interest. A case study comparison of Fremantle Ports (Australia) and the Indiana Toll Road (USA) is employed to demonstrate PPP design and function.Design/methodology/approachA description and evaluation of public private partnerships (PPP) is presented and two original and primary case studies are reviewed.FindingsA PPP functioning as a monopoly provider of a common pool public asset approximates economic efficiency when user fees cover virtually full cost. Identifying optimal output and quality assessment is more challenging in the case of social goods in which the public goal is subsidy minimization and clients cannot assess quality. Best practices are helpful; they guarantee the PPP process, but not the outcome. All PPPs, in whatever country or industry, are vulnerable to bureaucratic expansion whenever they are given access to subsidized loans underwritten by taxpayers.Originality/valueThe two case studies in this paper are 100 percent original; they were examined in person by the authors, and the managers of the two entities were interviewed in Indiana (USA) and Fremantle, Western Australia.