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Soft Budgets and Renegotiations in Public-Private Partnerships

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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File URL: http://cowles.econ.yale.edu/P/cd/d17a/d1723.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1723.

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Length: 34 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:cwl:cwldpp:1723
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Web page: http://cowles.econ.yale.edu/

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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2007. "The Basic Public Finance of Public-Private Partnerships," Levine's Bibliography 843644000000000313, UCLA Department of Economics.
  2. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
  3. J. Luis Guasch & Jean-Jacques Laffont & Stephane Straub, 2005. "Concessions of Infrastructure in Latin America: Government-led Renegotiation," ESE Discussion Papers 132, Edinburgh School of Economics, University of Edinburgh.
  4. J. Luis Guasch & Jean-Jacques Laffont & Stephane Straub, 2004. "Renegotiation of Concession Contracts in Latin America," ESE Discussion Papers 103, Edinburgh School of Economics, University of Edinburgh.
  5. Maskin, Eric & Tirole, Jean, 2008. "Public-private partnerships and government spending limits," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 412-420, March.
  6. Bennett, John & Elisabetta Iossa, 2002. "Building and Managing Facilities for Public Services," Royal Economic Society Annual Conference 2002 22, Royal Economic Society.
  7. 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.
  8. Olivier Cadot & Lars-Hendrik Röller & Andreas Stephan, 2004. "Contribution to Productivity or Pork Barrel?: The Two Faces of Infrastructure Investment," Discussion Papers of DIW Berlin 458, DIW Berlin, German Institute for Economic Research.
  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, vol. 26(2), pages 393-411, March.
  10. J. Guasch & Jean-Jacques Laffont & Stéphane Straub, 2006. "Renegotiation of Concession Contracts: A Theoretical Approach," Review of Industrial Organization, Springer, vol. 29(1), pages 55-73, September.
  11. Blanc-Brude, Frederic & Goldsmith, Hugh & Valila, Timo, 2007. "Public-Private Partnerships In Europe: An Update," Economic and Financial Reports 2007/3, European Investment Bank, Economics Department.
  12. Hillman, Arye L, 1982. "Declining Industries and Political-Support Protectionist Motives," American Economic Review, American Economic Association, vol. 72(5), pages 1180-87, December.
  13. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2007. "The Basic Public Finance of Public-Private Partnerships," Working Papers 957, Economic Growth Center, Yale University.
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