Contractual Flexibility or Rigidity for Public Private Partnerships? Theory and Evidence from Concession Contracts

Contractual Flexibility or Rigidity for Public Private Partnerships? Theory and Evidence from Concession Contracts

Laure Athias (IDHEAP/SPAN, Université de Lausanne) and Stéphane Saussier (GREGOR, Chaire EPPP, IAE Paris)

In practice, contract design for Public Private Partnerships (PPPs) involves the challenge of including the “appropriate” level of flexibility: too much, and undesirable opportunistic renegotiations are likely to be necessary, too little, and opportunities for welfare-enhancing renegotiations will be lost. In this article, we address this issue by focusing on the way parties adjust prices over time in PPPs. We argue that the peculiarities of PPPs ensure that prices have the function of limiting the ex post adjustment costs. In order to highlight the trade-offs at stake between contractual flexibility and rigidity in the design of price provisions, we develop a model that includes renegotiation and maladaptation costs. We assess the empirical validity of our theoretical predictions using original data from 71 tollroad concession contracts taken from a range of different locations worldwide. Our results point to the importance of concerns related to economic efficiency, as well as for the political process, in the design of PPP contracts.

Keywords: Contractual Design, Public Private Partnerships, Concession Contracts, Price Provisions, Toll Adjustments, Incomplete Contracting