What Impact Do Public-Private Partnerships Have on Economic Growth?

It’s impossible to evaluate the complete impact of public-private partnerships (PPPs) on overall economic growth. It is likely that a private-public partnership increases net investment in a specific industry and leads to greater project growth in a specific sector.

But we can’t be sure whether those funds would have been more productive elsewhere in the economy. In other words, the impact depends on the opportunity costs involved.

Key Takeaways

• Public-private partnerships allow large-scale government projects, such as roads, bridges, or hospitals, to be completed with private funding.
• Economists note that these partnerships work well when private-sector technology and innovation combine with public-sector incentives to complete work on time and within budget.
• However, risks for private enterprises include cost overruns, technical defects, and an inability to meet quality standards.

What Is a Public-Private Partnership?

Public-private partnerships are typically found in transport infrastructures such as highways, airports, railroads, bridges, and tunnels. Examples of municipal and environmental infrastructure include water and wastewater facilities. Public service accommodations include school buildings, prisons, student dormitories, and entertainment or sports facilities. PPPs also do the following:

• Allow large-scale government projects such as roads, bridges, or hospitals to be completed with private funding
• Work well when private sector technology and innovation combine with public sector incentives to complete work on time and within budget

However, economists are mixed as to the net benefit of PPPs on economic growth. Historically, public-private partnerships have been contractual or memorandum-driven agreements between public offices and private enterprises.

The public and private parties share resources such as financing, labor, capital, and management. A PPP exists through an agreement where the skills of each sector are shared in delivering a service to the general public.

Important

PPP contracts can include “minimum revenue guarantees,” where any shortfall in revenue is covered by taxpayer money. This is socializing losses but privatizing gains.

More broadly speaking, PPPs are the natural extension of mixed economic systems. Governments are increasingly aware of their own inefficiencies, and many run into budgeting or financing problems when executing projects. By contracting with more efficient private providers of goods and services, a public agency can still promote its agenda.

Public-private partnerships sometimes exist as a transitional step between a public service and a privatized service. This concept, called corporatization, purports to ease the adjustment from public to private transformations by gradually incorporating market-based decisions.

The number of PPPs has expanded dramatically since the 1970s. While many of these projects have been accepted and praised by the public at large, research by Professor Thomas DiLorenzo (Loyola College, Maryland) and Paul C. Light (Brookings Institution) has shown that many government-funded non-profit PPPs have primarily served as a tool for federal agencies to lobby for additional funding.

Impact of Private-Public Partnerships on Economic Growth

Economic growth is driven by investment and increases in productive output, making it possible for individual workers to command a higher value for their labor and achieve a higher standard of living. Do PPPs allow resources to be used more efficiently and cause the marginal output to increase?

Advantages

Partnerships between private companies and the government provide advantages to both parties. Private-sector technology and innovation, for example, can help provide better public services through improved operational efficiency.

The public sector, for its part, provides incentives for the private sector to deliver projects on time and within budget. In addition, creating economic diversification makes the country more competitive in facilitating its infrastructure base and boosting associated construction, equipment, support services, and other businesses. 

Disadvantages

Some analysts contend that by diverting resources (money and labor) from market-driven ends to politically driven ends, PPPs harm growth. Proponents counter that the effective provision of public goods, such as education and roads, helps promote economic growth.

In turn, critics of public-private alliances say that public goods could be provided much more effectively by the private sector alone if it weren’t for the crowding-out effect of public distortions in the capital markets.

What Is an Example of a Public-Private Partnership?

An example of a public-private partnership is the development of toll roads. A government contracts with a private company to build and maintain a highway and as part of the agreement, the private company can collect the tolls for a pre-defined period to recover its development costs and generate a profit.

This benefits all parties as the public receives new infrastructure, the public’s tax money is not used to build the highway, the government doesn’t have to use its funds, and the private company receives a contract where it has an assured and constant revenue stream.

What Are the Benefits of Public-Private Partnerships?

Benefits of public-private partnerships (PPPs) include cost savings, risk sharing, better services, and economic growth. PPPs combine the strengths of private companies, such as efficiency and innovation with those of the public sector, such as resources and stability. PPPs develop large infrastructure projects without having to use significant taxpayer money. With PPPs, these projects are generally completed faster and with better quality as private companies have a vested interest in their long-term success.

What Are the Disadvantages of Public-Private Partnerships?

Disadvantages of public-private partnerships (PPPs) include higher costs, loss of governmental control, and the risk of corruption. For private companies, profit is the ultimate goal, so this may come at the sacrifice of public needs, which may lead to expensive services or lower quality. Additionally, if there are issues with the private partner, such as it failing, the burden may fall on taxpayers.

The Bottom Line

It is likely that there is a net economic loss to the extent that public officials make resource decisions for PPPs. While public officials may be as intelligent, capable, and well-meaning as their private-sector management counterparts, the impossibility of social calculation renders political decisions ineffective.

Even if the PPP is well-run relative to other government programs, it still diverts resources from purely private market-based decisions that are guided toward their most efficiently productive ends.

At the same time, PPPs allow for the construction of public works that may not be built by private enterprises on their own. They incentivize the market to produce things that benefit society, even if there may be some economic cost at the outset.