Public-Private Cooperation in Infrastructure Development: A Principal-Agent Story of Contingent Liabilities, Fiscal Risks, and Other (Un)pleasant Surprises

With increasing pressure on physical infrastructure and limited resources, most governments have turned to various forms of collaboration with the private sector to help finance, build, and/or operate public assets. While the benefits of such joint efforts are potentially numerous, they also entail major risks that are hard to assess adequately. This paper discusses the economic and financial rationale, including risks, for partnerships between the public and the private sectors as a way to share the burden of developing infrastructure. It also proposes a principal-agent framework to help conceptualize the relations between the government and the private firm in public-private partnerships (PPPs).