Contract duration: Barrier or bridge to successful public-private partnerships?

Abstract

Public-private partnerships (PPPs) are predominantly executed through the use of formal contracts which define the relationship between a public agency and private supplier. As such, a PPP is not a generic contract between buyer and supplier but rather a specific contractual arrangement between a public buyer and private supplier. The contract captures the responsibilities of each party in achieving a specific set of performance objectives. Given budgetary pressures faced by public agencies, there is an increasing need for suppliers to make investments which could reduce future-year costs of meeting contract performance objectives. This research addresses two overarching questions specific to the issue of private, supplier-side investment. First, “how does public agency and private supplier perception of risk influence contract duration?” and second, “how does contract duration influence private investment?” To answer these questions, structured interviews were conducted with those in public agencies and private, supplier firms actively engaged in PPPs. Factors suspected to contribute to the risk position of public and private actors were evaluated. Additionally, linkages between public buyer-private supplier risk position, contract duration and private, supplier-side investment were addressed. Outcomes suggest properly structured long-term contracts may: 1) provide the risk mitigation mechanisms needed for both public and private actors, and 2) facilitate private, supplier-side investment.