Public Private Partnership. A Public Private Partnership is an arrangement by which a government service or private business project is funded and operated through a partnership between the government and private sector.
Benefits of PPPs
- Private sector expertise. Private firms should have more expertise in building and running the project, so quality will be high and consumer welfare will be high.
- Less work for the government. The government do not need to get involved in the planning, construction or maintenance of the project, they are free to focus on other things.
- Less borrowing required. Because the government pay over a long period of time they do not need to borrow much in the short-term. So the government can continue to spend on other projects in the meantime, there is less of an opportunity cost of the project. Also, the government could reduce taxes.
Costs of PPPs
- Inadequate service. Maybe the private sector provides a poor quality of service even if they are given performance targets.
- Excessive profits. Maybe too much profit has been negotiated for the private sector. This is not cost-effective for the government. The private sector firm may even recommend and carry out more work than is required simply to increase their own profits.
- Borrowing costs. The government are secure and not risky so borrowing costs should be low. Private firms are deemed more risky so borrowing costs will be higher. Any borrowing by the private sector to fund a PFI project will be more expensive than the equivalent government borrowing.