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Soft Budgets and Renegotiations in Public-Private Partnerships

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  • Eduardo Engel
  • Ronald Fischer
  • Alexander Galetovic

Abstract

Public-private partnerships (PPPs) are increasingly used to provide infrastructure services. Even though PPPs have the potential to increase efficiency and improve resource allocation, contract renegotiations have been pervasive. We show that existing accounting standards allow governments to renegotiate PPP contracts and elude spending limits. Our model of renegotiations leads to observable predictions: (i) in a competitive market, firms lowball their offers, expecting to break even through renegotiation, (ii) renegotiations compensate lowballing and pay for additional expenditure, (iii) governments use renegotiation to increase spending and shift the burden of payments to future administrations, and (iv) there are significant renegotiations in the early stages of the contract, e.g. during construction. We use data on Chilean renegotiations of PPP contracts to examine these predictions and find that the evidence is consistent with the predictions of our model. Finally, we show that if PPP investments are counted as current government spending, the incentives to renegotiate contracts to increase spending disappear.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15300.

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Date of creation: Aug 2009
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Handle: RePEc:nbr:nberwo:15300

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  1. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
  2. J. Luis Guasch & Jean-Jacques Laffont & Stéphane Straub, 2007. "Concessions of infrastructure in Latin America: Government-led renegotiation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 22(7), pages 1267-1294.
  3. Engel, Eduardo & Fischer, Ronald & Galetovic, Alexander, 2008. "The Basic Public Finance of Public-Private Partnerships," Working Papers, Yale University, Department of Economics 35, Yale University, Department of Economics.
  4. J. Guasch & Jean-Jacques Laffont & Stéphane Straub, 2006. "Renegotiation of Concession Contracts: A Theoretical Approach," Review of Industrial Organization, Springer, Springer, vol. 29(1), pages 55-73, September.
  5. John Bennett & Elisabetta Iossa, 2002. "Building and Managing Facilities for Public Services," Economics and Finance Discussion Papers, Economics and Finance Section, School of Social Sciences, Brunel University 02-08, Economics and Finance Section, School of Social Sciences, Brunel University.
  6. Maskin, Eric & Tirole, Jean, 2006. "Public-Private Partnerships and Government Spending Limits," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 439, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Cadot, Olivier & Roller, Lars-Hendrik & Stephan, Andreas, 2006. "Contribution to productivity or pork barrel? The two faces of infrastructure investment," Journal of Public Economics, Elsevier, Elsevier, vol. 90(6-7), pages 1133-1153, August.
  8. J. Luis Guasch & Jean-Jacques Laffont & Stephane Straub, 2004. "Renegotiation of Concession Contracts in Latin America," ESE Discussion Papers, Edinburgh School of Economics, University of Edinburgh 103, Edinburgh School of Economics, University of Edinburgh.
  9. Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(2), pages 393-411, March.
  10. J. Luis Guasch & Stéphane Straub, 2006. "Renegotiation Of Infrastructure Concessions: An Overview," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 77(4), pages 479-493, December.
  11. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, American Economic Association, vol. 72(5), pages 1180-87, December.
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Cited by:
  1. Marco Buso, 2014. "Public-Private Partnership: Information Externality in Sequential Investments," "Marco Fanno" Working Papers 0176, Dipartimento di Scienze Economiche "Marco Fanno".
  2. Kang, Chao-Chung & Lee, Tsun-Siou & Huang, Szu-Chi, 2013. "Royalty bargaining in Public–Private Partnership projects: Insights from a theoretic three-stage game auction model," Transportation Research Part E: Logistics and Transportation Review, Elsevier, Elsevier, vol. 59(C), pages 1-14.
  3. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2011. "Public-Private Partnerships and Infrastructure Provision in the United States," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 277, Centro de Economía Aplicada, Universidad de Chile.
  4. Calderon, Cesar & Serven, Luis, 2010. "Infrastructure in Latin America," Policy Research Working Paper Series 5317, The World Bank.
  5. Gawel, Erik, 2011. "Political drivers of and barriers to Public-Private Partnerships: The role of political involvement," Working Papers 98, University of Leipzig, Faculty of Economics and Management Science.
  6. Martins, Ana Cravinho & Marques, Rui Cunha & Cruz, Carlos Oliveira, 2011. "Public-private partnerships for wind power generation: The Portuguese case," Energy Policy, Elsevier, Elsevier, vol. 39(1), pages 94-104, January.

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