A view the Istanbul New Airport under construction OZAN KOSE/AFP/Getty Images

The PPP Concerto

There are good reasons why privately financed infrastructure projects become significantly more expensive – and slower to complete – than planners anticipate. One solution is to bring in private financing only after a project is completed.

CAMBRIDGE – As an old tale has it, there once was a competition between two pianists. After listening to the first pianist, the jury awarded the prize to the second. There was no need to listen further, because who could possibly be worse?

The same logic may seem to apply to public-private partnerships (PPPs) to provide infrastructure such as roads, power, water, airports, or the development of major tourist areas. In fact, listening to both contestants, and assessing their strengths and weaknesses, is essential.

The first pianist is public provision, which faces two challenges: an incentive (or corruption) problem and a budget problem. The incentive problem stems from the fact that when governments procure a road project, the winning contractor may cut corners, because he gets to pocket the savings. He might even share those savings with the government officials supervising the contract. The budget problem stems from the fact that there is only so much that a government can safely borrow, because it will have to raise future taxes to repay the debt. As a consequence, many worthwhile projects must be postponed.