The regulation of public-private partnerships

Abstract

We study the regulation of Public-Private Partnerships (PPPs), focusing on highways. We describe the specific characteristics of PPP contracts, their strengths and weaknesses, and their efficient regulation. One of the main problems of PPPs is that contracts are often renegotiated, which can negate the benefits of selecting the firm via competitive tender, increasing costs to the public and the possibility of corruption. This chapter analyzes approaches for dealing with these problems. We also discuss how different sources of risk should be allocated and show that it is efficient to assign demand risk to the public. The efficient contracts in this case are availability contracts when there are no user fees, and a present value of revenue contracts when tolls are charged. The conclusion is that the lessons from experience with PPPs over the last three decades show how this organizational form can be regulated to provide an attractive option for providing transport infrastructure such as highways and airports.