NCPA - National Center for Policy Analysis

The Problem with Public-Private Partnerships

November 9, 2010

In our half-political, half-private world, there are a growing number of public-private partnerships (PPP).  Almost nothing in the current world can be done without implicit or explicit permission by local, state, federal or (increasingly) global regulators.  But the term, public-private, is normally used to denote the joint funding and, sometimes, joint management of some "public" facility -- streets, water systems, and so forth, says Fred Smith, president and founder of the Competitive Enterprise Institute.

The rationale for "public" investments is that they are "public" goods, whose benefits are not adequately captured by the provider.

Sometimes, public-private partnerships can be a transitional step toward privatization.  The concept of "corporatization" -- that is, reorganizing an activity now performed by some political agency so that its inherent economic realities become more understandable and transparent -- may be a useful step in privatizing the activity, says Smith.

In most cases, however, public-private partnerships are simply a means of using tax breaks, regulatory easing, taxpayer support and so forth to subsidize some private activity.  Examples include:

  • Mass transit.
  • Hotels and Malls.
  • Downtown development districts.

Unforeseen consequences of public-private partnerships often include:

  • Log-rolling and pork-barrel politics -- I'll vote for your PPP if you vote for my PPP.
  • Weakened market tests -- resources are devoted to a project not because it benefits the citizenry but rather because it benefits a powerful interest group.
  • Weaker Management -- absent market tests, managers are less motivated to find that mix of services and creative array of financing tools to ensure that it proves "profitable."
  • Lack of innovation.
  • Corruption.
  • Crowding Out -- government already seizes a disproportionate amount of our wealth and the PPP concept allows it to further distort the allocation by market forces.

Source: Fred Smith, "The Problem with Public-Private Partnerships,", November 8, 2010.

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