Influence of the Tendering Mechanism in the Performance of Public-Private Partnerships: A Transaction Cost Approach

ABSTRACT

This article develops a theoretical model, based primarily on transaction costs, with which to compare the various tendering mechanisms for public-private partnership (PPP) projects. In particular, the model contrasts negotiated procedures with the open procedure, as defined by current European Union legislation on public tendering. The model includes both ex ante transaction costs (borne during the tendering stage) and ex post transaction costs (such as enforcement costs, renegotiation costs, and costs arising from litigation between partners) and explains the trade-off between them. The bottom line is that it is difficult to justify the extensive use of negotiated procedures in many countries.

KEYWORDS:

• auction
• negotiated procedure
• procurement
• public-private partnership
• tendering
• transaction costs

Notes

Following Stambrook (2005), the term “performance” in this article implies a more general notion than just the quality of service provided by the private contractor. Stambrook cites “the quality of service provided” as just one of many performance measures to characterize successful public-private partnerships. In the present article, better performance by contractual agreement is achieved when a given quality is obtained at a lower transaction cost; production costs are here taken as given, as in the model they are assumed to be nondependent upon the tendering mechanism.

Imperfect information can mean either that information is the same for all agents but (given the assumption of bounded rationality) not complete, or that one of the parties has an information advantage (asymmetry).

Incentives in the contract may be partly explained by asset ownership, bundling, and risk sharing (e.g., Hart, 2003; Shleifer, 1998).

The discussion in this article follows Williamson’s classification of transaction costs but distinguishes transaction costs as ex ante and ex post, before and after contract signature. Some authors use a different terminology and consider the ex post costs as adaptation costs to the original contracts (Bajari, Houghton, & Tadelis, 2014).

Additional information

Notes on contributors

Antonio Sánchez Soliño

Antonio Sánchez Soliño is an Associate Professor at the Universidad Politécnica de Madrid.

Pilar Gago de Santos

Pilar Gago de Santos is an Assistant Professor at the Universidad Complutense de Madrid.