The effects of governance on performance: the case of Public–Private Partnership (PPP) toll roads in Indonesia

Abstract

This article examines how contract model selection shapes PPP governance, which may affect the construction performance of PPP Toll Roads in Indonesia. This study compares the performance of PPP contracts used to build the 49 toll road projects, i.e. the Build-Operate-Transfer (BOT), Supported BOT (SBOT) and Design-Build-Finance-Operate-Maintenance (DBFOM) contracts. Using an Instrumental Variable Two-Stage Least Squares Regression (IV-2SLS) approach, this study discovers that SBOT contracts have lower costs and shorter completion times than BOT contracts due to a better incentive structure, which includes not only various government supports but also stronger control mechanisms in preparation, monitoring and audit. Meanwhile, using an OLS regression, DBFOM contracts have lower costs and shorter completion times than BOT contracts because private firms were able to better internalize externalities and perform better design and monitoring because they were in charge of the planning from the beginning. These findings suggest that the choice of contract has significant effects on the construction performance of PPP and transaction cost minimization is one of the keys to consider in the selection of PPP contract governance, especially to anticipate cost overrun and time delay risks.