The Productivity Effect of Public–Private Partnership

ABSTRACT Public–Private partnerships (PPPs) are often employed by public authorities to deliver infrastructure and public services through contracts bundling construction, operation, and maintenance over extended periods. Using a novel dataset covering the universe of Italian district heating plants (DHs) from 2007 to 2014, I show that PPP improves firm‐level productivity by incentivizing investments in higher capital quality. Capital quality—proxied by a thermal density index derived from the characteristics of the DH pipeline network—significantly improves productivity only when combined with PPP procurement. A structural production function approach reveals that a one‐unit increase in capital quality raises output by 19% in PPP firms, with negligible effects in non‐PPP firms. Counterfactual calculations suggest that enforcing PPP‐like quality standards across all plants would increase average output by 3266 MWh and reduce CO 2 emissions by 1568 tons per plant per year. The results are robust to selection bias, measurement error, and functional form misspecification. While this paper provides the first evidence that PPPs enhance productivity in network utilities by internalizing technological externalities between construction and operation, whether these gains fully translate into welfare improvements through pricing and Value for Money remains an open question for future research.