Risk Allocation and Incentives for Private Contractors: An Analysis of Italian Project Financing Contracts

Abstract

Based on the economic literature and international comparison, the paper examines the adequacy of the terms of Italian project financing contracts to build and operate public works, and identifies potential areas for improvement. We analyze the main contractual content of the public works construction and management concessions submitted to the Project Financing Technical Unit with a view to monitoring public-private contract partnerships. Overall, the analysis reveals the backwardness of the Italian system and the existence of not insignificant problem areas. The survey supports the need to foster adequate standardization of contracts in Italy aimed, in particular, at ensuring: i) the provision of more appropriate mechanisms for the employment of penalties for breach of contract by the concessionaire, especially in the management phase, and – conversely – of reward mechanisms; ii) the inclusion of clauses relative to the sharing of financing documents by the contracting authorities; iii) appropriate attention to the quantitative elements of the business plan; and iv) the strengthening of supervisory activity of the grantor during the various phases of the contract.