Public-private Partnership Contracts Research Articles

Government Supports in Public–Private Partnership Contracts: Metro Line 4 of the São Paulo Subway System

In November 2005, the state government of Sao Paulo, Brazil, announced the intention to bid a 30-year contract to build, operate, and explore passenger services for the Metro Line 4 of the Sao Paulo Metropolitan Subway System. Given the high risk of the project, to attract private investors the bid documents stipulated that the government would offer risk-mitigation mechanisms such as subsidy payments and a minimum demand guarantee (MDG). Because an MDG has option-like characteristics, the real-options approach is used to analyze the effect of these incentives on the value and the risk of the Metro Line 4 concession project, and their cost and risk to the government. The results indicate that the incentives proposed are effective in reducing the risk, and increase the net value of the project by 36% at a cost to the government of 5% of the total value of the project. Additionally, it is shown that for a given cost, the most effective risk-reduction mechanisms are the ones that include a higher portion of minimum demand guarantees relative to the subsidy payment. The approach developed can assist transportation authorities in designing optimal incentive mechanisms.

Issues of asymmetric information in public-private partnership contracts within Jordanian healthcare sector

Public-private partnership (PPP) contract is a special type of governance. Under a PPP contract, a central-government agency or a local authority and a private agent bargain a long-term contractual agreement to build a public infrastructure or the providence of a public service, such that risks, returns and resources are optimally shared among partners. The health sector has applied such PPP schemes in the recent decades for two primary reasons: 1 lack of government budgetary support for the health sector and the search for an alternative source of funding 2 the emergence of privatisation in the health sector. However such schemes of contracts are fully related to issues of asymmetric information such as the problems of moral hazard, adverse selection and market for lemons. These problems undermine the shared optimal results of PPPs contracts. Jordanian Health sector has witnessed some healthcare cuts. The sector also endeavoured on such PPP contracts to lessen the deteriorating consequences of the health sector. This paper exposes the Jordanian experience of PPPs in the health sector. Related issues of asymmetric information are treated and some remedy propositions are advanced.

Public-Private Partnerships: The Underlining Principles of Infrastructure Investment, Finance and Development Projects

In a lot of countries, paucity and inadequate of resources upon the public investments available for infrastructuralprojects have led government to request the private sector to go into long-term contractual agreements for theinvesting and maintenance of capital intensive development projects.This paper analyzes the underlining principles of infrastructure investment, finance and development projects,centering on Public Sector (PS) and Public-Private Partnerships (PPPs). We demonstrated that projectinvestments are suitable for PPP infrastructure projects, since properties and development projects are situated ina precise location.Furthermore, in the scenario of an accurately formulated PPP contract, the higher expenditure of capital andinvestment are perhaps the compensation for competence, effectiveness and advantages of PPPs. Lastly, weanticipated that PPP modification will continue to advance in the future, when more detailed and specializeacademic research has been adequately conducted with the aids of innovative ideas and results orientedoutcomes reported accordingly.

The ‘bankability’ of the new waste technologies: an econometric method for risk sharing in private finance waste contracts

The identification of risk and its appropriate allocation to partners in project consortia is essential for minimizing overall project risks, ensuring timely delivery and maximizing benefit for money invested. Risk management guidance available from government bodies, especially in the UK, does not specify methodologies for quantitative risk assessment, nor does it offer a procedure for allocating risk among project partners. Here, a methodology to quantify project risk and potential approaches to allocating risk and their implications are discussed. Construction and operation of a waste management facility through a public-private finance contract are discussed. Public-private partnership contracts are special purpose vehicle (SPV) financing methods promoted by the UK government to boost private sector investment in facilities for public service enhancement. Our findings question the appropriateness of using standard deviation as a measure for project risk and confirm the concept of portfolio theory, suggesting the pooling of risk can reduce total risk and its impact.

Structuring PPP toll-road contracts to achieve public pricing objectives

Although the success of public–private partnership (PPP) contracts is often evaluated on financial terms, an even more fundamental question is whether these contracts achieve the public objectives for which they were designed. The state's responsibility as contracting agency for public infrastructure gives it a crucial role in defining these goals, which fall into multiple categories and can vary for each procurement. For toll-road PPPs, the category of pricing objectives is a significant component of these broader public goals. Such pricing objectives often include (1) achieving an affordable toll rate, (2) managing congestion and (3) minimizing state subsidy/maximizing up-front payment from concessionaires. To identify the specific PPP contract elements which support these pricing-related objectives, the method of qualitative comparative analysis was applied. Through this recently developed approach for evaluating qualitative data quantitatively, patterns of PPP contract strategies which correspond to t...

Key Performance Indicators in Highway Design and Construction

AASHTO has expressed the need for formalized and effective performance-based management in highway projects. Performance measures and key performance indicators (KPIs) are widely used by international highway agencies to manage performance in public–private partnership contracts, with great success. Performance measures have been used by a number of U.S. state departments of transportation (DOTs) to manage highway agency performance, but the use of formalized KPIs is limited. This research presents information from four detailed design–build (DB) case studies. The case studies were selected from DOTs with mature performance management systems to determine how contractor performance is managed during design and construction. The research found that although performance measures were used in the majority of the case studies, formal KPIs were not. This paper provides a description of practices for managing performance during design and construction and how the current practices and DB requests for proposal offer state DOTs the opportunity to implement KPIs effectively. The results include examples from each case study revealing how the opportunities for design and construction KPIs are aligned with higher agency-level performance measures. The findings and these relationships were determined for six different performance areas common to design and construction: (a) cost and schedule monitoring, (b) quality monitoring, (c) safety management, (d) public information management, (e) environmental stewardship, and (f) traffic reliability during construction. Results of this study may assist agencies and researchers in developing a more standard form of performance management.

Market-based approaches in water and sanitation: The role of entrepreneurship

Interest in market-based approaches to solving development challenges continues to grow. The water and sanitation sector is no exception, although discussion has been coloured by experience with public–private partnerships (PPPs). Yet the number of PPP contracts in the developing world is very limited, especially by comparison to the multitude of small, often informal, enterprises active in water or sanitation. With fewer than half of Africans connected to water or sewerage networks, arguably it is these smaller providers, many entrepreneurial in nature, that are most relevant to the development community. Whilst the existence of these providers has been known for some time, a workable modus operandi for engaging with them is still being developed. There are significant political and economic challenges to integrating them within public sector programmes. This article explores the different markets in water and sanitation provision and the roles that entrepreneurship plays. It argues that, with global interest in social entrepreneurship rising, the water and sanitation sector is well placed to capitalize on a hidden strength.

Revisiting the Strengths and Limitations of Regulatory Contracts in Infrastructure Industries

This paper evaluates regulation by contract in public-private partnerships (PPPs) in infrastructure services. Although the benefits of competition for the market and of regulatory contracts are widely acknowledged, the literature identifies several failures in their design. These flaws are present in both developed and developing countries and arise in all types of contracts. This study analyzes both contractual PPPs and institutionalized PPPs (mixed companies). The evidence suggests that for all kinds of contracts, the major problems tend to arise in the preparation of public tender documents: the best bidder is not often the winner. The likely results include redistribution in favor of the private partner, weak incentives for high performance, and renegotiation of contracts. Moreover, risks are not allocated correctly nor is effective monitoring ensured. This review of contract procedures and design allows us to draw several implications for policy makers and to present suggestions and recommendations for improving regulatory contracts.

Government obligations in public-private partnership contracts

Traditional models of full and open competition are generally applied for ordinary public procurement contracts, whereas special competitive procedures (such as unsolicited proposals) are permissible under various international and domestic frameworks for “Public-Private Partnership” (PPP) contracts. In case of the latter category of contracts, some concerns about relative lack of transparency and competition in the award process have begun to surface, while they are being increasingly relied upon for development of public infrastructure and services. This paper focuses on certain aspects of competition and transparency in the award of PPP contracts, vis-à-vis normal public procurement contracts. To facilitate a sharper identification of legal issues, it compares the relevant regulations and case law in India applicable to unsolicited proposals (UNPs) with that in the United States and those under available international frameworks. It concludes with recommendations on identified legal dimensions of UNPs with reference to government obligations on transparency and competition, so as to adequately preserve these elements in procurement of PPP infrastructure projects.

Optimizing the size of public-private partnership contracts in the water sector: implications from an estimated cost function of private operators

In public-private partnership (PPP) contracts of water utilities, of particular concern is lack of market competition. This paper focuses on the size of contracts. If governments design a large-scale transaction, economies of scale in service operation can be expected, but competition in auctions may be compromised. For small contracts many firms will apply, but at the cost of scale diseconomies in operation. The estimated cost function of PPP water utilities indicates that economies of scale exist but diminish quickly as production increases. There is no rationale for more than 300 million cubic meters of water service concessions under a single package, taking a risk of little competition. Conversely, less than 50 million cubic meters of concessions are too small; the bundling approach is required.

Análise dos Normativos de Contabilidade Internacional sobre contabilização de contratos de parcerias público-privada

This article deals with, in the context of the accounting convergence to international standards for publicly held companies to international standards, due to Law n°11.638/07, accounting for the concession arrangements contracts for public-private partnerships (PPP) by the operator when the objective is to perform the contract and/or operate infrastructure (roads, power distribution, water and other utilities). Such contracts generate various accounting tasks, with different economic characteristics, which give explanations and interpretations in the light of specific economic and accounting theories. It is performed with emphasis a literature review on PPP contract risks, specific accounting standards and discussion of disclosure of contracts risks. We conclude that although the standard has the objective to deal with the conflicts arising from economic events of the PPP, adjustments should be done due to lack of risk measurements on the standard.

Balancing Private and Public Interests in Public–Private Partnership Contracts through Optimization of Equity Capital Structure

Capital structure and revenue-sharing agreements lie in the essence of balancing public and private interests in public–private partnership (PPP) contracts. In the United States, many PPP projects may not be fully self-financed through tolls or other user fees because of insufficient revenue streams. With a limited debt capacity secured by toll revenues, most PPP projects must be supported by both private equity investments and public funds. The equity structure is critical in a PPP contract because it implies risk and profit sharing and therefore provides a mechanism for private incentive and protection of the public interest. This paper presents a structured approach to determining the debt–equity investment in PPP projects. Scenarios are generated by using linear programming and probability programming models to reach the optimal equity structure under risk and uncertainty. The I-10 connector project is used as a case study to demonstrate the optimization process. The model is especially useful for public agencies to (a) estimate the range of private equity investment, (b) determine the target equity structure, and (c) document the benefits and costs of private financing for a successful PPP contract.

Innovation in public–private partnerships (PPPs): the Spanish case of highway concessions

This article identifies the factors that determine innovation in transport PPPs in Spain. Innovation is an important way of achieving efficiency but it is not an intrinsic characteristic of PPP projects. The authors describe the multiple regression model they devised to estimate innovation. The results show that PPP contracts can be designed to maximize innovation in R&D. However, there does not appear to be greater innovation in any other areas. The information provided has important implications for public service organizations considering new contracts with the private sector.

Public-Private Partnership in Portugal – The Legal Structure of the Public-Private Partnership Contract and the Peripheral Contracts

Public-Private Partnership in Portugal – The Legal Structure of the Public-Private Partnership Contract and the Peripheral Contracts

Future challenges for transport infrastructure pricing in PPP arrangements

In this paper we report the conclusion of a research project dedicated to pricing regimes in public-private partnership contracts for the provision of transport infrastructure ( Macário et al., 2009). Several elements have been brought to the bulk of knowledge that supports the design and implementation of public-private partnership in the transport sector. These developments have been achieved in the following domain: • Understand difficulties of price setting within the PPP environment, given the potential conflict of interest among the different parties engaged, go beyond the discussion of first best versus second-best price setting mechanisms. • Understand the role of government and regulators in the performance of a PPP. • Translate the issue of asymmetries of information between parties into a risk taking language. • Devise alternative contractual designs that will enable competitive price setting. • Understand that a structural element is missing to conciliate the views of the different stakeholders over a PPP: a bridge between infrastructure costs and charges. The objective of this paper is to overview the main challenges ahead of transport infrastructure pricing, considering the current and likely future policies as well as the field constraints. Moreover, a proposal is formulated to overcome some of the current pitfalls associated to transport infrastructure pricing.

L’efficacité de la catégorisation des contrats de la commande publique

Les contrats de la commande publique Français au sens large, dont le marché public – de travaux, de fournitures ou de services - la délégation de service public, le contrat de partenariat et même le bail emphytéotique administratif, sont proches en tant que contrats de «faire-faire». Mais, ces contrats sont catégorisés et spécialisés, la France ne connaissant en effet pas de régime unique et générique pour ses contrats de l’administration. Or cette catégorisation est rigide et complexe. Il est ainsi en France extrêmement difficile de créer de nouvelles formes contractuelles, et ce dû au fait que chaque contrat doit entrer dans une catégorie préexistante et prédéfinie. Si ce stricte (à supp) encadrement des contrats de la commande publique semble dicté par une volonté de sécuriser les relations entre l’administration et ses cocontractants, on peut néanmoins se demander si ce principe de catégorisation n’engendre pas un coût supplémentaire pour les cocontractants.

The Theory of Incentives Applied to the Transport Sector

Building upon Iossa and Martimort (2008), we study the main incentive issues and the form of optimal contracts for Public Private Partnerships (PPPs) in transports. We present a basic model of procurement in a multitask environment in which a risk-averse firm chooses unobservable efforts in infrastructure and service quality. We begin by analyzing the effect on incentives and risk transfer of bunding building and operation into a single contract. We consider the factors that affect the optimal allocation of demand risk and their implications for the choice of contract length. We discuss the dynamics of PPP contracts and how the risk of regulatory opportunism affects design and incentives.

Soft Budgets and Renegotiations in Public-Private Partnerships

Public-private partnerships (PPPs) are increasingly used to provide infrastructure services. Even though PPPs have the potential to increase efficiency and improve resource allocation, contract renegotiations have been pervasive. We show that existing accounting standards allow governments to renegotiate PPP contracts and elude spending limits. Our model of renegotiations leads to observable predictions: (i) in a competitive market, firms lowball their offers, expecting to break even through renegotiation, (ii) renegotiations compensate lowballing and pay for additional expenditure, (iii) governments use renegotiation to increase spending and shift the burden of payments to future administrations, and (iv) there are significant renegotiations in the early stages of the contract, e.g. during construction. We use data on Chilean renegotiations of PPP contracts to examine these predictions and find that the evidence is consistent with the predictions of our model. Finally, we show that if PPP investments are counted as current government spending, the incentives to renegotiate contracts to increase spending disappear.

Using Public-Private Partnerships to Expand Subways: Madrid-Barajas International Airport Case Study

In the beginning of 2006, the regional government of Madrid decided to expand the subway network to the new Terminal T-4 in Madrid-Barajas International Airport using a public-private partnership (PPP) approach. Owing to the peculiar characteristics of this new access as the enlargement of an existing subway line, the PPP approach was based on separating infrastructure management from transportation service operation. The PPP contractor was entrusted with the infrastructure construction and maintenance while Madrid’s public subway company remained in charge of operating the trains. This paper examines the theoretical foundation that justifies the implementation of different PPP approaches to deal with urban rail projects. The paper then explains the reasons why a nonintegrated PPP approach was ultimately adopted for the expansion of Madrid’s subway network to the airport. From the outcome of the tender and the present operation performance, we find that nonintegrated PPP contracts have important advantages for urban rail PPPs, particularly for conventional subway networks. These advantages are notable in terms of encouraging economies of scale and density, boosting competition, and reducing the financial costs.

Adaptação, pelos Árbitros, dos Contratos de Parceria Público-Privada (“PPP”)

ABSTRACT: Several long-term contracts contain hardship or equivalent clauses which foresee that, periodically, or in case that a change in the original economic circumstances causes an imbalance to the contractual obligations, the parties should renegotiate certain essential elements of the agreement, in order to adapt it to the new circumstances. However, the vast majority of these contracts do not establish which are the consequences of a failure of the negotiations between the parties. In light of the public interest involved in the performance of Public-Private Partnership contracts, it is worth considering whether an arbitrator could, upon request of the parties, and in case of failure of the parties' negotiations, adapt the contract to new economic circumstances. Some commentators and case law recognise the power of the arbitrators to adapt the contractual provisions, others simply deny it. However, these opinions and decisions somehow convert, since they all establish that arbitrators can adapt a contract when they are expressly authorised by the interested parties. The possibility of including such an express authorization in a contract must be evaluated in view of the applicable law. In Public-Private Partnership contracts, this requirement is even more relevant.