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 dele-gates the construction and management operations to a private sector consortium. The bundling of project stages induces, at the construction stage, the consortium to invest 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 conces-sion contract, in which the construction and management activities are provided by two di¤erent \u85rms. The purpose of this paper is two-fold. First, we show that an appropriate institutional framework is the key factor responsible for the success of PPP projects. Second, we specify the economic determinants of the government decision to prefer PPP contracts to conventional forms of procurement, when the government fails to honor its commitments