The Perverse Incentives of Public-Private Partnerships

ByMario Campo

This article by Mario Campo originally appeared in the February 18, 2026 edition of Sin Embargo.

The late Chilean-Mexican economist Emilio Ocampo Arenal used to warn his students that Public-Private Partnerships (PPPs) were “to be wary of.” How right he was. When I heard this warning, which suggested an awareness of the fine print, this scheme was gaining prominence during Felipe Calderón’s presidency. Shortly thereafter, the President would send a bill to Congress to promote the proliferation of this model. Years later, the cesspool would be uncovered and the corruption exposed. Honoring the warning of the old sea dog who was my teacher, the promise of “efficiency” of PPPs not only went unfulfilled, but mutated into something that destroyed both public and private wealth.

At their best, PPPs can fill capital gaps. Under the guise of “operational efficiency,” which is more of a leap of faith than an irrefutable fact, the private sector promises to facilitate the introduction of technology and innovation to improve public services and free up limited state resources. Another touted advantage is the timely and on-budget delivery of projects. They can also reduce uncertainty through multi-year timeframes. Furthermore, proponents argue that the risk of design, construction, and operation is transferred to the private sector. It is in this last point that the most sordid aspects of these contracts lie.

At their worst, PPPs offer risk-free and disproportionate returns for rentiers and influence peddlers. As the World Bank warns, “…there is no unlimited risk: private companies will be cautious about accepting risks beyond their control… If they assume these risks, it will be reflected in the price of the service. Private companies will also want to know that the rules of the game must be respected by the government, such as tariff increases.” In plain terms, the devil is in the contractual design. To entice investors initially and then guarantee the project’s long-term operation, the government can indelibly sign off on coverage for unforeseen revenue shortfalls. By mitigating or completely eliminating risk for the private sector, which may lose all incentive to innovate and improve, some PPPs privatize the profits and socialize the losses from the outset.

At the heart of the abuse is a cobra effect. In economic theory, a perverse incentive occurs when a mechanism designed to produce a specific outcome alters the behavior of rational agents in such a way that they end up producing a contrary or undesirable result, often worsening the original problem. The eponymous, instructive case occurred when the British colonial government in Delhi, India, attempted to curb a plague of venomous cobras by offering a monetary reward for each dead cobra skin turned in by citizens. People, responding to rational (but not moral) impulses to maximize income, began raising cobras in their homes to kill them and collect the reward. Faced with the snake outbreak, the government canceled the program, and the breeders, in response, released the worthless cobras into the streets. By the end of the day, Delhi had more cobras than before the extermination campaign had begun.

The most emblematic case of perverse incentives in Mexico is the contract for Federal Social Rehabilitation Center No. 12 in Guanajuato, replicated in eight federal prisons awarded as public-private partnerships (PPPs) between 2010 and 2011. Originally operated by ICA and later sold to investment funds, the contract stipulates that the federal government must pay the private operator a monthly fee based on the maximum installed capacity of 2,520 inmates, regardless of the actual number of prisoners. Although the prison operated at times at 60-70 percent occupancy, the contract eliminated the incentive for “efficiency” by guaranteeing payments based on full occupancy. Due to the one-way risk under the contract, public spending became a fixed income (without any return) for the operator. An additional perverse incentive is that, having already paid the full fee, the operator has the constant temptation to ration food: every peso saved increases net profit, regardless of the health and rights of the inmates.

Another embarrassing case is that of the Bicentennial Viaduct and the Mexiquense Outer Circuit. Awarded to OHL (now Aleática) by Enrique Peña Nieto, the project became a cash cow for the Atlacomulco Group. Unlike a typical concession where the company collects tolls for 20 years and then withdraws, a clause guaranteed a real annual return of 10 percent. Essentially, if OHL invested 10 billion pesos, the contract promised a return of that amount plus a 10 percent annual profit. Under this arrangement, if in Year 1 traffic fell short of projections, as it did, and the company didn’t earn enough to cover the guaranteed profit (which also happened), the state’s debt to the contractor grew by an amount equivalent to the difference. In practice, to make up the shortfall, the company raised tolls at will and extended the concession period to more than 60 years, securing a lucrative deal.

Criticism of PPPs isn’t directed at private enterprise per se, but at the greed of those who, through influence and trickery, rake in windfall profits. It’s corruption, stupid. Plundering the state isn’t synonymous with entrepreneurial talent, but with corruption and white-collar crime. In the case of many exploitative contracts of the past, the state ended up paying an inflated price for a broth with tofu meatballs, far removed from the promised meat.

Following a political shift, the Infrastructure Investment Plan for Well-being includes mixed investment schemes. A primary difference compared to Public-Private Partnerships (PPPs) is the allocation of resources, given that 70 percent will finance energy projects and railways. Another is that the government defines and retains majority share ownership. Yet another is the standardization of unit costs to minimize hidden overpricing.

As a key difference, in the old model, the private sector designed, financed, built, and operated the infrastructure, while the government simply paid a guaranteed monthly rent for 20 or 30 years of the concession. In effect, the hospital, the highway, or the prison were privatized. In contrast, in the new model, the state maintains control of critical infrastructure, and the private sector contributes capital and technology in exchange for an operating profit. By eliminating sovereign guarantees of profitability, the private investor assumes market risk, which was previously mitigated in public-private partnerships (PPPs). In principle, under the new scheme, perverse incentives are eliminated or at least reduced.

It’s not all sunshine and rainbows. The sour notes could be lurking in a lack of competitive appetite for the projects, doubts about their commercial appeal, or the legal conditions that the financing provider might impose. In general, although the shift towards PPPs is real, the implementation risk is significant. But if the government can ensure that, instead of raising snakes at home, investors openly monitor the snakes, hunt them down with their weapons, and lose money if the unwanted species proliferates, then the perverse incentives could be tamed. In that sense, the new mixed investment scheme shows promise.

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