What are Public-Private Partnerships?

Public-Private Partnerships are sometimes referred to as PPPs or P3s. E.R. Yescombe (Public-Private Partnerships: Principles of Policy and Finance, p.3) describes project-based or contract-based PPPs as having the following elements:

1. a long-term contract between public and private entities,
2. for the design, construction, financing, and operation of public infrastructure by the private sector,
3. with payments over the life of the contract made by either the public sector party or by the general public as users of the facility, and
4. with the facility remaining in public sector ownership (or reverting to the public sector at the end of the contract).

But I am interested in a slightly different version of P3s, though perhaps applied to the same types of issues:

1. an entity created with two types of "owners", one that is profit-motivated (i.e. private sector) and one that is mission-motivated and controlled through a political process (i.e. generally public sector),
2. by "owners", I mean that the entities have a claim to the assets of the entity (i.e. "owners" can provide debt, equity, or various hybrids financial sources), and
3. the mixed "owner" arrangement is often evidenced through Board structure, staffing, etc.

In this sense, I am talking about true legal partnerships, not just contractual arrangements between parties with differing motives. A good example of this was Fannie Mae and Freddie Mac where they had private common stock owners, but their Board was composed of 18 members, 5 of which were appointed by the President of the United States. Further, while the entity had common stockholders, it also had access to implicit and explicit forms of borrowing from the U.S. Treasury.

Economists describe this mix of motives as having mixed or dual "objective functions." For example, profit-motivated companies have an objective function to maximize profits (i.e. revenues less expenses), subject to the production function (i.e. the combination of labor and capital that produces output). Public, or non-profit, entities have an objective function to maximize quality or quantity, subject to the constraint of resources. Obviously, when both motives are combined into the same entity, there is opportunity for both conflict and synergy.

Furthermore, the role played by each type of entity is evidenced by the type of capital they provide (i.e. debt or equity). In this sense, a theory of P3s can use some of the same tools as used by Modigliani and Miller's (M&M) theory of capital structure. It is this combination (i.e. entities with mixed motives plus capital structure theory) that intrigues me about P3s and offers an opportunity to create a new theory of P3 capital structure and how it can be used to result in more effective partnerships.

More to follow...