ECONOMIC REPORT OF THE PRESIDENT

firms that are not ultimately responsible for operating or maintaining a
structure have less incentive to adopt designs or construction methods that
minimize total costs over the project’s complete life cycle, which includes its
construction, operation, and maintenance. By contrast, and depending on
how the contract is structured, PPPs can “bundle” the responsibilities of different
project phases, so that, for example, a single private firm is responsible
for the design, construction, financing, operation, and maintenance of the
infrastructure asset. This arrangement provides strong incentives for ontime
project delivery and cost minimization over the entire life cycle of the
structure (Hart 2003), though PPPs can also be organized so that the private
sector is responsible for just some of the phases of the project.
Second, given that the public sector would still be responsible for
funding the project under conventional provision, the government would
incur most or all of the risk associated with its underutilization or inadequate
performance. In other words, should actual use of a project fall short of its
expected level, or prove substandard in terms of its engineering or design,
the responsible government agency—and ultimately, the taxpayers—would
bear much or all of the resulting financial strain. On the other hand, the
bundled nature of PPPs allows at least some of the demand and performance
risks associated with the project to be transferred from the government
agency sponsoring the project to the contracting firm (Buckberg, Kearney,
and Stolleman 2015). This arrangement also serves to promote more effective
project design and efficient construction. It may even ensure that more
reliable and cost-effective materials are used, thus ensuring longevity and
reducing the frequency of required maintenance.10
Nevertheless, because PPPs have potential drawbacks, it is critical to
design them carefully and use them only when appropriate. PPPs in which
a government compensates the private entity directly through availability
payments do not reduce the demand risk borne by the government, because
the private partner must be paid as long as the infrastructure service meets
contracted quality standards, even if actual utilization of the service is far
below expectations. This drawback, however, can be overcome. Partnerships
between government agencies and private firms can be structured to mitigate
the demand risks faced by the government in developing a new infrastructure
asset. For example, a PPP contract could stipulate that the private
firm finance the project and receive compensation through the collection of
10 This incentive is especially relevant if the builder is also responsible for the maintenance of
the structure.
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