Analyzing risk in PPP provision of utility services: A social welfare perspective

Abstract

This paper analyzes the trade-offs between the social cost of risk bearing and incentive effects for technical efficiency in PPP contracts for utilities. Using a principal-agent perspective and assuming the government principal maximizes social welfare, the government should be risk neutral. It is inefficient for PPP agents to provide financing. Design/build offers the greatest potential PPP gains, but not necessarily more than fixed-price contracts. There may also be efficiency benefits during the operations phase. But, if agents have little control over revenues, then PPP operation creates substantial risk-bearing costs for agents.