Government Opportunism in Public‐Private Partnerships

• Date: 01 February 2015
• Published date: 01 February 2015
• DOI: http://doi.org/10.1111/jpet.12105
• Author: VANESSA VALERO

GOVERNMENT OPPORTUNISM IN PUBLIC-PRIVATE

PARTNERSHIPS

VANESSA VALERO

European University Institute

Abstract

This paper analyzes the contracting out of public services

through public-private partnerships (PPP) subject to gov-

ernment opportunism. In PPP, the building of public infra-

structure and the provision of related services are procured

through only one contract. On the one hand, such bundling

of tasks provides incentives to invest in the infrastructure to

minimize the cost of providing public services over the long

term. On the other hand, it creates incentives for the gov-

ernment to behave opportunistically, by not respecting the

terms of the long-term contractual agreement. Contrarily,

in the traditional procurement (TP), the public service pro-

vision tasks are contracted out separately. The purpose of

this paper is two fold. First, we show that government com-

mitment not to engage in opportunistic behavior is the key

factor determining the cost efficiency of PPP. Second, we

specify the economic determinants of government’s choice

between PPP and TP under government opportunism.

1. Introduction

The last three decades have witnessed a trend toward private sector involve-

ment in the provision of public services. Governments are increasingly

Vanessa Valero, European University Institute, Via delle Fontanelle 10, I-50014 San

Domenico di Fiesole, Italy (vanessa.valero@eui.eu).

I wish to thank Wilfried Sand-Zantman, Ruxanda Berlinschi, Elisabetta Iossa, J´

erˆ

ome

Pouyet, Benno B¨

uhler, Malin Arve, Axel Gautier, Daniel Benitez, Antonio Russo, Olga

Gorelkina, and the participants at the ECORE Summer School 2009, at AFSE 2009, at PET

2010, at ICIED 2010 and EARIE 2010 for helpful discussions. I also thank Heiko Karle,

Antonio Estache, and the participants at the Ecares - CEPR Conference, “The Role of

Incentives, Information and the Private Sector in the Delivery of Public Services” for useful

comments. I am also grateful to St´

ephane Saussier and the participants to the seminar at

the “Chaire des PPPs” for their helpful remarks. Finally, I wish to thank the editor, the

associate editors, and the anonymous referees for their useful comments.

Received July 10, 2013; Accepted August 2, 2013.

C2014 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 17 (1), 2015, pp. 111–135. 111

112 Journal of Public Economic Theory

turning to the private sector to build and operate public infrastructure such

as roads, schools, prisons, hospitals, and water facilities. State withdrawal

from the provision of public services has led to the use of partnerships

between the public and the private sectors. These partnerships refer to

contractual arrangements between a government and a private party for

the building of public infrastructure and the delivery of related services

traditionally provided by the public sector. They take place through a variety

of contracts from the traditional form of public procurement, traditional

procurement (TP), to the modern form, public-private partnership (PPP).

The aim of this paper is to compare the cost efficiency of PPP with the

cost efficiency of TP in different institutional frameworks. In TP,the building

of public infrastructure and the delivery of related services are contracted

separately. In PPP, the public service provision tasks are procured through

one contract. The difference between these two procurement contracts re-

flects a belief that giving the private sector the responsibility for building

and operating public infrastructure leads to increased efficiency in service

provision. More specifically, such bundling of tasks is believed to provide the

private sector with an incentive to design and build infrastructure with fea-

tures that lower the cost of service provision over the long term (Hart 2003).

Most features of this modern procurement method have been inspired by

the English Private Finance Initiative (PFI), often seen as a success. In a study

of 29 projects in the United Kingdom, Andersen and Enterprise LSE (2000)

found that the average cost saving was 17% in PFI projects. In Australia, PPPs

are 11% more cost efficient than traditional forms of procurement (Allen

Consulting Group 2007). Although PPP programs have become increasingly

widespread, experience is mixed in emerging and developing economies, in

which the institutional framework is weaker. In Central and Eastern Euro-

pean (CEE) countries, the lack of government commitment to honor the

terms of contracts have led to significant additional transaction costs in the

highway sector (Brenck et al. 2005). In Latin America and the Caribbean

countries, Guasch, Laffont, and Straub (2007) found that the social costs of

such a lack of commitment are likely to be high, especially in the water and

transport sectors. In countries with weak institutions, it appears that the cost

efficiency of PPP may be reduced.

In this paper, we first present the government’schoice between PPP and

TP contracts under government commitment, i.e., supported by strong insti-

tutions. Then, we compare both contracts when PPP suffers from lack of gov-

ernment commitment not to engage in opportunistic behavior i.e., in weak

institutional frameworks. We start our analysis by developing a two-period

model of procurement in which a government must procure a public service

project. Each task of the project, the building of a public infrastructure and

its operation, is carried out by a private sector firm. This firm has private in-

formation about its efficiency and may take unobservable actions that affect

its cost. For instance, it may make an extra investment in the construction

stage to ease the operating task and then reduce its cost. In PPP, the builder