Analysis of alternative tendering mechanisms for transportation Public-Private Partnerships

This paper describes a theoretical model based primarily on transaction costs, for comparing the various tendering mechanisms used for transportation Public-Private Partnership (PPP) projects. In particular, the model contrasts negotiated procedures with the open procedure, as defined by the current European Union legislation on public tendering. The model includes both ex ante transaction costs (borne during the tendering stage) and ex post transaction costs (such as enforcement costs, re-negotiation costs, and costs arising from litigation between partners), explaining the trade-off between them. Generally speaking, it is assumed that the open procedure implies lower transaction costs ex ante, while the negotiated procedure reduces the probability of the appearance of new contingencies not foreseen in the contract, hence diminishing the expected value of transaction costs ex post. Therefore, the balance between ex ante and ex post transaction costs is the main criterion for deciding whether the open or negotiated procedure would be optimal. Notwithstanding, empirical evidence currently exists only on ex ante transaction costs in transportation infrastructure projects. This evidence has shown a relevant difference between the two procedures as far as ex ante costs are concerned, favouring the open procedure. The model developed in this paper also demonstrates that a larger degree of complexity in a contract does not unequivocally favour the use of a negotiated procedure. Only in those cases dealing with very innovative projects, where important dimensions of the quality of the asset or service are not verifiable, may we observe an advantage in favour of the negotiated procedure. The bottom line is that we find it difficult to justify the employment of negotiated procedures in most transportation PPP contracts, especially in the field of roads. Nevertheless, the field remains open for future empirical work and research on the levels of transaction costs borne ex post in PPP contracts, as well as on the probabilities of such costs appearing under any of the procurement procedures.

Analysis of the Optimal Sharing of Construction Risk in Public Procurement Contracts

This paper discusses a model based on the agency theory to analyze the optimal transfer of construction risk in public works contracts. The base assumption is that of a contract between a principal (public authority) and an agent (firm), where the payment mechanism is linear and contains an incentive mechanism to enhance the effort of the agent to reduce construction costs. A theoretical model is proposed starting from a cost function with a random component and assuming that both the public authority and the firm are risk averse. The main outcome of the paper is that the optimal transfer of construction risk will be lower when the variance of errors in cost forecast, the risk aversion of the firm and the marginal cost of public funds are larger, while the optimal transfer of construction risk will grow when the variance of errors in cost monitoring and the risk aversion of the public authority are larger