Political accountability, incentives, and Contractual design of public private partnerships

Service adaptations, when there is changing demand or problems regarding the service provision, 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 public-service provider (no market price), public authorities have also an important role to play in the adaptation of the private public-service provision over time. This paper studies how the contractual design of PPPs affects 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. This is due to the fact that under a concession contract consumers are empowered, i.e. have the possibility to oust the private provider, which provides public authorities with more credibility in side-trading. (2) Concession contracts can give greater adaptation effort incentives to private providers than availability contracts, since, if private providers bear the demand risk, they can receive private gains from implementing the adaptation. 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.