ABSTRACT
This chapter analyses different contractual alternatives for private-sector participation (PSP) in the water and sanitation sector based on the concepts put forward by proponents of the new institutional economics (NIE). It introduces the concepts of bounded rationality, asymmetric information and transaction costs. The chapter evaluates alternative PSP contract forms with respect to their specific strengths and weaknesses for the contracting parties. It illustrates some key claims of the theoretical analysis by drawing on recent examples of PSP contract negotiations. The chapter examines how the NIE approach could help in the selection of more appropriate PSP structures in the future. It presents anecdotal evidence about cases where information asymmetry and transaction costs either had a major impact on the outcome of PSP processes or were identified as major obstacles to sound co-operation. A potential lock-in situation due to asset specificity increases the vulnerability of the investor to opportunistic behaviour by the other party.
