The contractual and administrative regulation of public-private partnership

Abstract

Public-private partnership (PPP) contracts have been extensively used in developing countries as a device of promoting and attracting private investment to network industries. PPP contracts typically define rights and obligations regarding the design, build, operation and maintenance of infrastructures and the mechanisms for their supervision but also may include provisions about tariffs, access and interconnection rights or levels of service, conditions that are conceptually considered as economic regulation. Literature (Stern (2003)) has emphasized that the use of such contracts in the developing world, has permitted to mitigate the risks associated with the administrative intervention of governments on private investment, being important in the analysis of these risks to distinguish between economic regulation from other types of contractual obligations. This paper presents empirical evidence from a developing country, Peru, which identifies the factors that influence the decision to incorporate economic regulation in PPP contracts, from a sample of 65 transport infrastructure, energy and telecommunications projects. The results show that factors such as the risks of demand, the scale of the projects, the source of financing and technology have influenced significantly in governments' decision of including economic regulation provisions in PPP contracts. These findings, the evolution of private investor's perception on regulatory risk and the indicators of stakeholder's satisfaction with PPP model, suggest the need to outweigh the ‘certainty’ guarantees provided by contractual regulation with the transparency and accountability attributes of administrative regulation.