The Private Financing Component in Public-Private Partnerships

The document argues that while PPPs are often viewed as a means to access private capital, the primary goal should be maximizing value for money (VFM). It challenges the assumption that PPPs must be 100 per cent privately financed, suggesting that a hybrid structure—combining low-cost public financing with private capital—can reduce the weighted average cost of capital (WACC) without sacrificing risk transfer. By applying and then critiquing the Modigliani-Miller theorem, the author asserts that in practice, private lenders do not significantly increase their rates when public financing is introduced, allowing for a more cost-effective project structure. The paper concludes that an optimal capital structure minimizes private financing to the level required for bankability and concessionaire incentive (net security), thereby reducing the total cost to society.

• Public decision-makers often prioritize access to private financing over value for money (VFM), which can result in suboptimal deal structuring.
• The perceived higher cost of private financing compared to public borrowing rates is misleading because public borrowing rates do not account for implicit government guarantees regarding construction cost overruns and delays.
• PPPs do not require 100 per cent private financing; countries such as Canada, the Netherlands, the United States, and India utilize combinations of private finance, government grants, milestone payments, or low-interest loans.
• Contrary to the Modigliani-Miller theorem, which suggests capital structure is irrelevant to a project's value, evidence from developed economies indicates that the cost of the private financing component does not significantly increase when virtually risk-free public financing is added.
• The failure of the Modigliani-Miller theorem in PPP practice can be attributed to market imperfections, specifically transaction costs and the rule-based approach used by financiers to price projects based on industry and revenue structures.
• An optimal PPP financing structure is achieved by minimizing the private financing component while ensuring it remains large enough to satisfy bankability (debt coverage ratios) and maintain 'net security' so the concessionaire is incentivized to complete the project.

APA

Verdouw, W. (2015). The Private Financing Component in Public-Private Partnerships. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/private-financing-component-public-private-partnerships-discussion-paper.pdf

Chicago

Verdouw, Wim. The Private Financing Component in Public-Private Partnerships. International Institute for Sustainable Development, 2015. https://www.iisd.org/system/files/publications/private-financing-component-public-private-partnerships-discussion-paper.pdf.

Wikipedia

{{cite report |last1=Verdouw |first1=Wim |title=The Private Financing Component in Public-Private Partnerships |publisher=International Institute for Sustainable Development |date=August 2015 |url=https://www.iisd.org/system/files/publications/private-financing-component-public-private-partnerships-discussion-paper.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{verdouw2015private, author = {Verdouw, Wim}, title = {{The Private Financing Component in Public-Private Partnerships}}, institution = {International Institute for Sustainable Development}, year = {2015}, month = aug, url = {https://www.iisd.org/system/files/publications/private-financing-component-public-private-partnerships-discussion-paper.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }