11) public private partnerships (government intervention)

Question 1

What is PPP and how does it work??

Answer 1

The government offload contracts to the private sector, who then bid on the project and will design, build and finance the scheme, to be paid back over several years by the government

Question 2

Why do the government use PPP?

Answer 2

-the private sector has more expertise, more incentive to make profits and therefore lower costs and exploit better economies of scale

Question 3

What are the advantages of PPP?

Answer 3

• productive efficiency- private sector more efficient at managing and producing
• extra effects- increasing education or healthcare projects has a positive externality of a better quality Labour force, increasing long run productivity etc
• Dynamic efficiency- the profits made from the investment can be reinvested to further improve the quality of stuff over time, or use profits from other projects to reinvest

Question 4

What are the disadvantages of PPP?

Answer 4

• Debt costs- the private sector borrows at a much higher rate than the government, so the project ends up having higher costs straight away just because the government aren’t borrowing the money
• inflexibility and poor value for money- if the project needs amending or wasn’t well planned but is under a fixed contract, it’ll increase costs to change this or revise the contract
• risk- ultimate risk lies with the public sector, as theres no guarantee that the private firm will make a better cost benefit analysis than the government
• administration- the process is lengthy and has many legalities, increasing costs as it increases number of people involved