Public-private partnerships and market concentration: the antecedents of private partners' returns

Public private partnerships (PPPs) have been often claimed to provide excessive returns to private partners. Although "inadequate" risk sharing among partners has been widely investigated in literature, the risk associated to... [ view full abstract ]

Public private partnerships (PPPs) have been often claimed to provide excessive returns to private partners. Although "inadequate" risk sharing among partners has been widely investigated in literature, the risk associated to the market concentration of private sector shareholders has not been considered yet. The existence of a lobby of major shareholders, co-investing in the same projects could indeed result in the establishment of a compact network inside the equity PPP market potentially affecting the price paid by public partners.
This paper contributes to the current debate on PPPs by considering if and how market concentration can influence the price paid by the public sector in PPP contracts. In particular, we investigate concentration of private shareholders in the PPP market and its impacts on internal rate of return of PPP contracts.
The dataset comprises 659 PFI/PPP contracts established in the UK over a time period of 17 years (1997-2014). Concentration is estimated considering both the influence of the direct control of shareholders and the indirect control of parent companies. Furthermore, concentration considers also the co-investment pattern as a result of a social network analysis.
The analysis shows that the market concentration of equity investors is a relevant driver in determining the return on PPP investments and the effect is more relevant in the healthcare sector.
We then discuss the implications of the paper by highlighting that, in the selection of the “adequate” procurement mode (i.e., public/private/public-private), policy makers should consider the market structure and the possible effects that market concentration can have on the price paid by the public partner in delivering infrastructures and related services.