Addressing Adverse Selection in Public-Private Partnership (PPP) Procurement: An Agent-Based Approach

Abstract

In risky public-private partnership (PPP) projects, governments and public institutions tend to offer private investors certain guarantees for their participation. However, when public sector capacity and institutions are weak, these guarantees can generate moral hazard in the bidding process and lead to contractual renegotiations, resulting in a loss for taxpayers. Drawing on a sophisticated, agent-based model that recreates the complex dynamics of the PPP procurement process, this paper demonstrates public sector competency is crucial for limiting moral hazard when guarantees are offered in PPP projects.

Keywords

Public-private partnerships procurement adverse selection moral hazard guarantees

Get full access to this article

View all access options for this article.

References

Axelrod

Tesfatsion

(2006). A guide for newcomers to agent-based modeling in the social sciences. Handbook of Computational Economics, 2(Appendix A), 1649–1659.

Bajari

Houghton

Tadelis

(2014). Bidding for incomplete contracts: An empirical analysis of adaptation costs. American Economic Review, 104(41), 288–1319. http://10.0.4.233/aer.104.4.1288

Bajari

McMillan

Tadelis

(2009). Auctions versus negotiations in procurement: An empirical analysis. Journal of Law, Economics, and Organization, 25(2), 372–399. https://doi.org/10.1093/jleo/ewn002

Bajari

Tadelis

(2001). Incentives versus transaction costs : A theory of procurement contracts. The Rand Journal of Economics, 32(3), 387–407. https://doi.org/10.2307/2696361

Baxter

Casady

C. B.

(2020a). Proactive and strategic healthcare public-private partnerships (PPPs) in the coronavirus (COVID-19) epoch. Sustainability, 12(12), 5097. https://doi.org/10.3390/su12125097

Baxter

Casady

C. B.

(2020b). A coronavirus (COVID-19) triage framework for (sub) national public–private partnership (PPP) programs. Sustainability, 12(13), 5253. https://doi.org/10.3390/su12135253

Bergen

Dutta

S. m.

Walker

O. C.

(1992). Agency relationships in marketing: A review of the implications and applications of agency and related theories. Journal of Marketing, 56(3), 1–24. https://doi.org/10.2307/1252293

Biava

P. M.

Basevi

Biggiero

Borgonovo

Burigana

(2011). Cancer cell reprogramming: Stem cell differentiation stage factors and an agent based model to optimize cancer treatment. Current Pharmaceutical Biotechnology, 12(2), 231–242. https://doi.org/10.2174/138920111794295783

Bloomfield

(2006). The challenging business of long-term public-private partnerships: Reflections on local experience. Public Administration Review, 66(3), 400–411. http://www.jstor.org/stable/3843920

10.

Brown

T. L.

Potoski

Slyke

D. V.

(2015). Managing complex contracts: A theoretical approach. Journal of Public Administration Research and Theory, 26(2), 1–24. https://doi.org/10.1093/jopart/muv004

11.

Burguet

Che

Y-K.

(2004). Competitive procurement with corruption. The Rand Journal of Economics, 35(1), 50–68. https://doi.org/10.2307/1593729

12.

Burton

R. M.

Obel

(2011). Computational modeling for what-is, what-might-Be, and what-should-Be studies-and triangulation. Organization Science, 22(5), 1195–1202. https://doi.org/10.1287/orsc.1100.0635

13.

Casady

C. B.

(2021). Examining the institutional drivers of public-private partnership (PPP) market performance: A fuzzy set qualitative comparative analysis (fsQCA). Public Management Review, 23(7), 981–1005. https://doi.org/10.1080/14719037.2019.1708439

14.

Casady

C. B.

(2022). The Public–Private Partnership Market Maturity Research Frontier. In Hodge

Greve

(Eds.), A Research Agenda for Public-Private Partnerships and the Governance of Infrastructure (pp. 259–274). Cheltenham, UK: Edward Elgar.

15.

Casady

C. B.

Baxter

(2020). Pandemics, public-private partnerships (PPPs), and force majeure| COVID-19 expectations and implications. Construction Management and Economics, 38(12), 1077–1085. https://doi.org/10.1080/01446193.2020.1817516

16.

Casady

C. B.

Baxter

(2021). Procuring healthcare public-private partnerships (PPPs) through unsolicited proposals during the COVID-19 pandemic. Journal of Public Procurement, 22(1), 6–16. https://doi.org/10.1108/jopp-07-2020-0061

17.

Casady

C. B.

Eriksson

Levitt

R. E.

Richard Scott

W. R.

(2019). (Re) Assessing public-private partnership governance challenges: An institutional maturity perspective. In Levitt

R. E.

Scott

W. R.

Garvin

(Eds.), Public-private-partnerships for infrastructure development: Finance, stakeholder alignment, governance (pp. 188–204). Cheltenham, UK: Edward Elgar.

18.

Casady

C.B.

Eriksson

Levitt

R. E.

Scott

W. R.

(2020). (Re) defining public-private partnerships (PPPs) in the new public governance (NPG) paradigm: An institutional maturity perspective. Public Management Review, 22(2), 161–183. https://doi.org/10.1080/14719037.2019.1577909

19.

Casady

C. B.

Flannery

Geddes

Palcic

Reeves

(2019). Understanding PPP tendering periods in Canada: A duration analysis. Public Performance & Management Review, 42(6), 1259–1278. https://doi.org/10.1080/15309576.2019.1597739

20.

Casady

C. B.

Geddes

R. R.

(2016). Private participation in US infrastructure: The role of PPP units. Washington, DC: American Enterprise Institute (AEI).

21.

Casady

C. B.

Geddes

R. R.

(2019). Private participation in US infrastructure: The role of regional PPP units. In Levitt

R. E.

Scott

W. R.

Garvin

(Eds.), Public-private-partnerships for infrastructure development: Finance, stakeholder alignment, governance (pp. 224–242). Cheltenham, UK: Edward Elgar.

22.

Casady

C. B.

Peci

(2021). The institutional challenges of public-private partnerships (PPPs) in transition economies: Lessons from kosovo. Economic Research-Ekonomska Istraživanja, 34(1), 1949–1965. https://doi.org/10.1080/1331677x.2020.1860791

23.

Chong

Staropoli

Yvrande-Billon

(2014). Auction versus negotiation in public procurement : Looking for empirical evidence. In Brousseau

Glachant

J.-M.

(Eds), The manufacturing markets, legal, Political and economic dynamics , pp. 120–42. Cambridge University Press.

24.

Coelho

M. D.

Burger

Tyson

Karpowicz

(2009). The effects of the financial crisis on public-private partnerships. International Monetary Fund.

25.

Cruz

C. O.

Marques

R. C.

(2011). Contribution to the study of PPP arrangements in airport development, management and operation. Transport Policy, 18(2), 392–400. https://doi.org/10.1016/j.tranpol.2010.12.001

26.

Dastani

Meyer

J.-J. C.

Gross

(2011). A logic for normative multi-agent programs. Journal of Logic and Computation, 23(2), 335–354. https://doi.org/10.1093/logcom/exr026

27.

Davis

J. P.

Eisenhardt

K. M.

Bingham

C. B.

(2007). Developing theory through simulation methods. The Academy of Management Review, 32(2), 480–499. http://www.jstor.org/stable/20159312

28.

de Brux

(2010). The dark and bright sides of renegotiation: An application to transport concession contracts. Utilities Policy, 18(2), 77–85. https://doi.org/10.1016/j.jup.2009.07.003

29.

de los Ángeles Baeza

Vassallo

J. M.

(2010). Private concession contracts for toll roads in Spain: Analysis and recommendations. Public Money & Management, 30(5), 299–304. https://doi.org/10.1080/09540962.2010.509179

30.

De Marchi

Page

S. E.

(2014). Agent-based models. Annual Review of Political Science, 17(1), 1–20. https://doi.org/10.1146/annurev-polisci-080812-191558

31.

De Palma

Leruth

Prunier

(2009). Towards a principal-agent based Typology of Risks in public-private partnerships. WP/09. International Monetary Fund.

32.

Di Bari

(2021). A barrier real option approach to evaluate public–private partnership projects and prevent moral hazard. SN Business & Economics, 1(3), 1–19. https://doi.org/10.1007/s43546-021-00042-z

33.

Doloi

(2009). Analysis of pre‐qualification criteria in contractor selection and their impacts on project success. Construction Management and Economics, 27(12), 1245–1263. https://doi.org/10.1080/01446190903394541

34.

Eisenhardt

K. M.

(1989). Building theories from case study research. The Academy of Management Review, 14(4), 532–550. https://doi.org/10.5465/amr.1989.4308385

35.

Engel

Fischer

Galetovic

(1997). Highway franchising: Pitfalls and opportunities. The American Economic Review, 87(2), 68–72. http://www.jstor.org/stable/2950886

36.

Engel

Fischer

R. D.

Galetovic

(2014). The economics of public-private partnerships: A basic guide. Cambridge University Press.

37.

Estache

Guasch

J.-L.

Iimi

Trujillo

(2009). Multidimensionality and renegotiation: Evidence from transport-sector public-private-partnership transactions in Latin America. Review of Industrial Organization, 35(1–2), 41–71. https://doi.org/10.1007/s11151-009-9225-0

38.

Estache

Saussier

(2014). Public-Private Partnerships and Efficiency: A Short Assessment. CESifo DICE Report, ISSN 1613-6373, ifo Institut - Leibniz-Institut für Wirtschaftsforschung an der Universität München, München,, 12(3), 8–13.

39.

Farmer

J. D.

Foley

(2009). The economy needs agent-based modelling. Nature, 460(7256), 685–686. https://doi.org/10.1038/460685a

40.

Farquharson

Torres de Mästle

Yescombe

E. R.

(2011). How to engage with the private sector in public-private partnerships in emerging markets. World Bank Publications.

41.

Feng

Cao

Duan

(2022). A critical review of studies on renegotiation within the public-private partnerships (PPPs) scheme. Engineering, Construction and Architectural Management. https://doi.org/10.1108/ECAM-09-2021-0790

42.

FHWA . (2015). https://www.fhwa.dot.gov/ipd/project_profiles/

43.

Flyvbjerg

(2005). Measuring inaccuracy in travel demand forecasting: Methodological considerations regarding ramp up and sampling. Transportation Research Part A: Policy and Practice, 39(6), 522–530. https://doi.org/10.1016/j.tra.2005.02.003

44.

Gatti

(2014). Government and market based instruments and incentives to stimulate long-term investment finance in infrastructure. OECD Working Paper.

45.

Girth

A. M.

(2014). A closer look at contract accountability: Exploring the determinants of sanctions for unsatisfactory contract performance. Journal of Public Administration Research and Theory, 24(2), 317–348. https://doi.org/10.1093/jopart/mus033

46.

Goldberg

V. P.

(1977). Competitive bidding and the production of precontract information. The Bell Journal of Economics, 8(1), 250–261. https://doi.org/10.2307/3003497

47.

Greve

Hodge

(2013). Rethinking public-private partnerships: Strategies for turbulent times. Routledge.

48.

Guasch

J. L.

(2004). Granting and renegotiating infrastructure concessions: Doing it right. World Bank Publications.

49.

Guasch

J. L.

Benitez

Portables

Flor

(2014). The renegotiation of PPP contracts: An overview of its recent evolution in Latin America. International Transport Forum Discussion Paper.

50.

Guasch

J. L.

Laffont

J.-J.

Straub

(2003). Renegotiation of concession contracts in Latin America (p. 3011). World Bank Publications.

51.

Guasch

J. L.

Laffont

J.-J.

Straub

(2007). Concessions of infrastructure in Latin America: Government‐led renegotiation. Journal of Applied Econometrics, 22(7), 1267–1294. https://doi.org/10.1002/jae.987

52.

Guasch

J. L.

Straub

(2009). Corruption and concession renegotiations. Evidence from the water and transport sectors in Latin America. Utilities Policy, 17(2), 185–190. https://doi.org/10.1016/j.jup.2008.07.003

53.

Harrison

J. R.

Lin

Carroll

G. R.

Carley

K. M.

(2007). Simulation modeling in organizational and management research. The Academy of Management Review, 32(4), 1229–1245. https://doi.org/10.2307/20159364

54.

Hart

Moore

(1988). Incomplete contracts and renegotiation. Econometrica: Journal of the Econometric Society, 56(4), 755–785. https://doi.org/10.2307/1912698

55.

Hellowell

Vecchi

Caselli

(2015). Return of the state? An appraisal of policies to enhance access to credit for infrastructure-based PPPs. Public Money & Management, 35(1), 71–78. https://doi.org/10.1080/09540962.2015.986896

56.

Hendry

(2002). The principal’s other problems: Honest incompetence and the specification of objectives. The Academy of Management Review, 27(1), 98–113. https://doi.org/10.2307/4134371

57.

Iossa

Martimort

(2012). Risk allocation and the costs and benefits of public--private partnerships. RAND Journal of Economics, 43(3), 442–474. https://doi.org/10.1111/j.1756-2171.2012.00181.x

58.

Kagel

J. H.

Levin

(1986). The winner ’ S curse and public information in common value auctions. The American Economic Review, 76(5), 894–920. http://www.jstor.org/stable/1816459

59.

Kauppi

van Raaij

E. M.

(2014). Opportunism and honest incompetence-seeking explanations for noncompliance in public procurement. Journal of Public Administration Research and Theory, Karjalainen, 25(3), 1–27. https://doi.org/10.1093/jopart/mut081

60.

Klein

(1998). Bidding for concessions : The impact of contract design. 158. Public policy for the private sector. World Bank. Retrieved June 24, 2022, from http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/282884-1303327122200/158klein.pdf

61.

Koppenjan

J. F. M.

Enserink

(2009). Public – private partnerships in urban infrastructures: Reconciling private sector participation and sustainability joop. Public Administration Review. March/April, 284–96.

62.

Kort

Klijn

(2013). Public–Private Partnerships in Urban Regeneration: Democratic Legitimacy and its Relation with Performance and Trust. Local Government Studies, 39(1), 89–106. DOI:10.1080/03003930.2012.683864

63.

Laffont

J.-J.

Meleu

(2001). Separation of powers and development. Journal of Development Economics, 64(1), 129–145. https://doi.org/10.1016/s0304-3878(00)00127-9

64.

Levine

S. S.

Prietula

M. J.

(2012). How knowledge transfer impacts performance: A multilevel model of benefits and liabilities. Organization Science, 23(6), 1748–1766. https://doi.org/10.1287/orsc.1110.0697

65.

Lohmann

Roetzel

P. G.

(2014). Opportunistic behavior in renegotiations between public-private partnerships and government institutions: Data on public-private partnerships of the German armed forces. International Public Management Journal, 17(3), 387–410. https://doi.org/10.1080/10967494.2014.935245

66.

Macy

M. W.

Willer

(2002). From factors to actors: Computational sociology and agent-based modeling. Annual Review of Sociology, 28(1), 143–166. https://doi.org/10.1146/annurev.soc.28.110601.141117http://www.jstor.org/stable/3069238

67.

Manzo

(2014). Potentialities and limitations of agent-based simulations: an introduction. Revue française de sociologie, 55(4), 653–688.

68.

Marques

R. C.

Berg

(2010). Revisiting the strengths and limitations of regulatory contracts in infrastructure industries. Journal of Infrastructure Systems, 16(4), 334–342. https://doi.org/10.1061/(asce)is.1943-555x.0000029

69.

Maskin

Tirole

(2008). Public-private partnerships and government spending limits. International Journal of Industrial Organization, 26(2), 412–420. https://doi.org/10.1016/j.ijindorg.2007.05.004

70.

McAfee

R. P.

McMillan

(1986). Bidding for contracts: A principal-agent analysis. The Rand Journal of Economics, 17(3), 326–338. https://doi.org/10.2307/2555714

71.

Neto

de Castro

E., Silva

Cruz

C. O.

Sarmento

J. M.

(2017). Understanding the patterns of PPP renegotiations for infrastructure projects in Latin America: The case of Brazil. Competition and Regulation in Network Industries, 18(3–4), 271–296. https://doi.org/10.1177/1783591718790712

72.

Nikolaidis

Roumboutsos

(2013). A PPP renegotiation framework: A road concession in Greece. Built Environment Project and Asset Management, 3(2), 264–278. https://doi.org/10.1108/BEPAM-05-2012-0031

73.

Owusu-Manu

D.-G.

Senanu Kukah

Boateng

Asumadu

Edwards

D. J.

(2020). Exploring strategies to reduce moral hazard and adverse selection of Ghanaian public–private partnership (PPP) construction projects. Journal of Engineering, Design and Technology, 19(2), 358–372. https://doi.org/10.1108/JEDT-05-2020-0195

74.

Prietula

Carley

Gasser

(1998). Simulating organizations: Computational models of institutions and groups (Vol 1). The MIT Press.

75.

Prozzi

Flanagan

Loftus-Otway

Porterfield

Persad

Jorge A Prozzi

J. A.

Walton

C. M.

(2009). Actual vs. Forecasted toll usage: A case study review. https://ctr.utexas.edu/wp-content/uploads/pubs/0_6044_1.pdf

76.

Putnam

R. D.

(1995). Bowling alone: America’s declining social capital. Journal of Democracy, 6(1), 65–78. https://doi.org/10.1353/jod.1995.0002

77.

Roehrich

J. K.

Lewis

M. A.

George

(2014). Are public–private partnerships a healthy option? A systematic literature review. Social Science & Medicine, 113(1), 110–119. https://doi.org/10.1016/j.socscimed.2014.03.037

78.

Sánchez Soliño

Gago Santos

(2010). Transaction costs in transport public–private partnerships: Comparing procurement procedures. Transport Reviews, 30(3), 389–406. https://doi.org/10.1080/01441640903037941

79.

Saussier

(2013). An economic analysis of the closure of markets and other dysfunctions in the awarding of concession contracts. EUI worning papers. RSCAS 2013/08.

80.

Saussier

Staropoli

Yvrande-Billon

(2009). Public–private agreements, institutions, and competition: When economic theory meets facts. Review of Industrial Organization, 35(1–2), 1–18. https://doi.org/10.1007/s11151-009-9226-z

81.

Soecipto

R. M.

Verhoest

(2018). Contract stability in European road infrastructure PPPs: how does governmental PPP support contribute to preventing contract renegotiation? Public Management Review, 20(8), 1145–1164. DOI:10.1080/14719037.2018.1428414

82.

Spackman

(2002). Public–private partnerships: Lessons from the British approach. Economic Systems, 26(3), 283–301. https://doi.org/10.1016/S0939-3625(02)00048-1

83.

Spulber

D. F.

(1990). Auctions and contract enforcement. Journal of law, economics & Organization, 6(2), 325–344. JSTOR.

84.

Tadelis

(2012). Public procurement design: Lessons from the private sector. International Journal of Industrial Organization, 30(3), 297–302. https://doi.org/10.1016/j.ijindorg.2012.02.002

85.

Teisman

G. R.

Klijn

E.-H.

(2002). Partnership arrangements: Governmental rhetoric or governance scheme? Public Administration Review, 62(2), 197–205. https://doi.org/10.1111/0033-3352.00170

86.

Tesfatsion

Judd

K. L.

(2006). Handbook of Computational Economics (Vol. II). Elsevier.

87.

Tirole

(1999). Incomplete contracts: Where do we stand? Econometrica, 67(4), 741–781. http://www.jstor.org/stable/2999457

88.

Trujillo

Quinet

Estache

(2002). Dealing with demand forecasting games in transport privatization. Transport Policy, 9(4), 325–334. https://doi.org/10.1016/s0967-070x(02)00022-7

89.

Van Den Hurk

Verhoest

(2016). The challenge of using standard contracts in public–private partnerships. Public Management Review, 18(2), 278–299. https://doi.org/10.1080/14719037.2014.984623

90.

Van Gestel

Voets

Verhoest

(2012). How governance of complex PPPs affects performance. Public Administration Quarterly, 36(2), 40–88. http://www.jstor.org/stable/41506768

91.

Vassallo

J. M.

Baeza

(2007). Why traffic forecasts in PPP contracts are often overestimated. Research Paper.

92.

Vecchi

Hellowell

Gatti

(2015). The risks perceived by private investors and the policy actions to attract private capital. OECD Working Papers.

93.

Waara

Bröchner

(2006). Price and nonprice criteria for contractor selection. Journal of Construction Engineering and Management, 132132(8), 7978. https://doi.org/10.1061/(ASCE)0733-9364

94.

Wang

Cui

Liu

(2018). Analysis of the risk-sharing ratio in PPP projects based on government minimum revenue guarantees. International Journal of Project Management, 36(6), 899–909. https://doi.org/10.1016/j.ijproman.2018.01.007

95.

Wang

Gao

H. O.

Liu

(2019a). Incentive game of investor speculation in PPP highway projects based on the government minimum revenue guarantee. Transportation Research Part A: Policy and Practice, 125(1), 20–34. https://doi.org/10.1016/j.tra.2019.05.006

96.

Wang

Liu

Xiong

Zhu

(2019b). Government support programs and private investments in PPP markets. International Public Management Journal, 22(3), 499–523. https://doi.org/10.1080/10967494.2018.1538025

97.

Wang

T.-Y.

Yang

Y.-H.

(2009). A fuzzy model for supplier selection in quantity discount environments. Expert Systems with Applications, 36(10), 12179–12187. http://dx.doi.org/10.1016/j.eswa.2009.03.018

98.

Waterman

R. W.

Meier

K. J.

(1998). Principal-agent models : An expansion. Journal of Public Administration Research and Theory, 8(2), 173–202. https://doi.org/10.1093/oxfordjournals.jpart.a024377

99.

Zhang

(2004). Improving concessionaire selection protocols in public/private partnered infrastructure projects. Journal of Construction Engineering and Management, 130(5), 670–679. https://doi.org/10.1061/(asce)0733-9364(2004)130:5(670)

100.

Zitron

(2006). Public–private partnership projects: Towards a model of contractor bidding decision-making. Journal of Purchasing and Supply Management, 12(2), 53–62. http://dx.doi.org/10.1016/j.pursup.2006.04.002