ABSTRACT
Governments in many industrialized nations have made concerted efforts to reduce their immediate expenditures and to reduce the cost of major infrastructure projects. Public–private partnerships (P3s) are one emerging method that might do so. Despite the increased use of P3s, there is little independent research on the effectiveness of P3s as a public policy instrument. This article considers the major rationales for P3s, including cost savings and keeping project financing off government budgets. It then presents a transaction cost model that suggests that P3s can often be prone to conflict, high contracting costs, opportunism and failure. Evidence from six major infrastructure projects and a summary analysis of US prisons is then presented. These cases confirm that contracting costs have been high, as predicted by the model. Specifically, high contracting costs reflect the presence of complexity/uncertainty, asset specificity, the potential for ex post bilateral opportunism and a lack of contract management skills by governments. Given these circumstances, the private sector can behave opportunistically at the expense of the public sector as there has sometimes been a political imperative to prevent projects from terminating. Public partners have also behaved opportunistically after projects are in place. Unless public sector managers recognize that they must design contracts that both compensate private sector partners for risk and then ensure that they actually bear it, P3s have little chance of being efficient or effective service delivery mechanisms.
