Government Opportunism in Public-Private Partnerships

This paper analyzes the contracting out of public services through Public-Private Partnerships (PPPs) subject to government opportunism. The government delegates the construction and management operations to a private sector consortium. The bundling of project stages induces the consortium to invest at the construction stage to achieve long-run cost savings. However, the consortiums incentive to invest is a¤ected by the governments lack of commitment. We characterize the optimal PPP contract when the government is opportunistic, i.e., when it fails to commit not to revise the contract. We compare this result to the optimal concession contract, in which the construction and management activities are provided by two di¤erent \u85rms. We show that the PPP contract can be more costly than the concession contract. This is contrarily to the widespread view that PPPs are the most e ¢ cient mechanisms for the provision of public services