Political Accountability, Incentives, and Contractual Design of Public Private Partnerships: Demand Risk on Private Providers or Public Authorities?
Abstract: Service adaptations constitute a major issue in Public Private Partnerships (PPPs). So far, studies have explained the ex post adaptation problems by the distorted incentives for the private public-service provider to invest in adaptation efforts. However, as any PPP is between a public authority and a private provider, public authorities have also an important role to play in the adaptation of the private provision over time. This paper studies how the contractual design of PPPs affects political accountability and incentives for contractually unanticipated service adaptations. More specifically, we observe worldwide two main different contracting out procedures: the concession contract and the availability contract. The main difference between these two contractual practices concerns the demand risk, which is borne by private providers in the first case and by public authorities in the second case. This paper shows that there are two main effects of the contractual design on accountability. (1) Concession contracts, compared to availability contracts, motivate more public authorities from investigating and responding to public demands. (2) Concession contracts can give greater adaptation effort incentives to private providers than availability contracts. The striking policy implication of this paper is then that the trend towards a greater resort to contracts where private providers bear little or no demand risk may not be optimal in terms of allocative efficiency.
