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PPP performance evaluation: the social welfare goal, principal–agent theory and political economy

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Abstract

Governments use public–private partnerships (PPPs) as their agents to finance, design, build, maintain and operate their public infrastructure. Despite wide use, many PPPs have produced poor outcomes, including large transaction costs, renegotiations and bankruptcies. Society delegates the authority to build and operate public infrastructure to governments, which must then choose the means of provision. The alternatives are either government-financed design-build contracting, followed by government operation and maintenance—traditional procurement (TP)—or a PPP. We examine this choice using principal–agent and political economy theories. We evaluate the performance of PPPs versus TP against the normative goal of social welfare (economic efficiency). As well, in a review of the empirical literature through 2022, we find no convincing evidence that PPPs provide superior social welfare, nor evidence that many projects been evaluated on this basis. Governments’ continued preference for PPPs in many cases is best explained by political goals and political economy theory. A review of recent empirical evidence supports the view that political economy variables contribute to PPP adoption.

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Notes

  1. The implicit principal-agent theory literature is much older. William Shakespeare addresses agency directly in Measure for Measure; King Lear and Coriolanus are also ruthlessly insightful.

  2. We do not address other arrangements where governments have entered into joint share ownership with private firms. These enterprises also involve complex incentive relationships and the potential for goal conflict (Vining et al., 2014, 2022).

  3. A reviewer notes that there are different versions of traditional procurement with differing principal-agent incentives. For tractability, we take the TP comparator to a PPP to be a fixed-price, design-build contract, rather than a design-bid-build contract.

  4. This social welfare criterion accepts the existing distribution of income and ignores distributional issues. It is appropriate to multiply the change in government surplus by a factor greater than one, since raising revenue involves taxation which often creates deadweight efficiency losses (Boardman et al., 2020).

  5. Hodge and Greve (2009, Table 1) review PPP performance through to 2007, but only consider ‘value for money’ as the evaluation criterion. Our Table 2 considers published studies through to 2022 found on Google Scholar using the search term ‘public–private partnerships’. We selected empirical or case studies that address at least some aspect of social welfare or test some implications of principal-agent theory in the PPP context. We exclude survey and interview studies.

  6. Cepparulo et al. (2019) do consider survey studies, as well as many other empirical studies.

  7. Cepparulo et al., (2019, Table 1) review articles that are based on case studies, official submissions and interviews, as well as several of the empirical studies which we review, in order to assess whether PPP adoption is a means of avoiding government budgetary restrictions.

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    Mark A. Moore & Aidan R. Vining

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Moore, M.A., Vining, A.R. PPP performance evaluation: the social welfare goal, principal–agent theory and political economy. Policy Sci 56, 267–299 (2023). https://doi.org/10.1007/s11077-023-09504-7

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