Contracting with the Government : Public Private Partnerships

Public-private partnerships (PPPs) are long-term contractual arrangements that bundle infrastructure investment with service delivery, typically involving a public authority and a private operator. Unlike traditional procurement, PPPs integrate the construction and operation phases, aligning incentives to minimize total lifecycle costs rather than just initial expenses. This structure can lead to efficiency gains, particularly when private actors leverage their expertise and economies of scale. Two main models exist: concession-based PPPs, where demand risk is borne by the operator and users pay directly for services; and availability-based schemes, where the public authority pays the operator based on performance, shielding the operator from demand fluctuations.

The key advantage lies in the operator’s incentive to optimize both upfront design and long-term operation. However, the complexity of PPPs stems from their incomplete, long-term nature. Risks of opportunistic behavior, renegotiations, and coordination failures are significant. Transaction cost economics sheds light on these issues, suggesting that successful PPPs rely on robust contractual design and a strong partnership culture.

Yet public contracts are not mere replicas of private ones. Their exposure to political scrutiny introduces third-party opportunism: stakeholders outside the contractual relationship—such as political opponents, watchdog groups, or citizens—may influence contract performance or renegotiation. As a result, public contracts tend to be more rigid ex-ante, leading to more frequent formal renegotiations. This rigidity reflects the necessity to anticipate external contestation and ensure legitimacy, which distinguishes public contracting from its private counterpart. PPPs, therefore, are not just about efficiency—they are embedded in the political and institutional environment in which they operate.

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