Towards a market destruction for PPP? A Transaction Cost Analysis of the Pre-Contractual Cost Burden of Public-Private Partnerships.

Objective:
While public entities are still increasingly interested in Public-Private Partnerships (PPPs), we recently observe increasing reluctance from some private partners to engage in PPP-bidding. Up-front costs that PPP bidders make, are considered too high compared to the bidding chances and the expected profit, and may result in less bidders in the future. Dudkin et al. (2005) warned that high transaction costs may constitute a serious impediment to enter the bidding process. In this paper, we empirically analyze transaction costs of PPPs in the pre-contractual stage and compare these to similar costs borne by private partners for traditional public procurement (TPP). Further, the paper offers a systematic comparative assessment of the magnitude and determinants of transaction costs in PPPs and in TPPs. Finally, we formulate some suggestions to lower these costs or to improve the cost/benefit position of private, in order to safeguard the competitive setting of the PPP market.

Data/Methodology:
Extant PPP research lacks empirical studies because of the immaturity of PPP markets and the confidential nature of the data. We counter these issues by focusing on the pre-contractual phase. This focus is interesting because high costs in this phase may constrain the project's viability. Following Dudkin et al.'s (2005) argument that transaction costs vary between institutional contexts, our database is restricted to Belgian projects. In line with opinions of experts and practitioners, gathered through 10 in-depth interviews, we focus on the transactions and costs borne by the private sector, since they would suffer significantly. 42 senior managers, were surveyed, which resulted in a database of 204 infrastructure projects (95 PPPs and 106 TPPs). We used non-parametric tests to appoint the differences in the magnitudes of the transaction costs' determinants, and a correlation analysis was used to analyze the relationship between the different determinants of transaction costs.

Results/Findings:
Regarding the level of transaction costs in the pre-contractual phase, we observe that the private firms make significant higher costs for a PPP, than for a TPP. However, we note that compensation fees for PPPs are actually related to the costs made for a TPP bidding. Moreover, we argue that PPP transactions are burdened by a greater uncertainty and a less mature market, but also generate significant more positive spill-over effects (both internally and externally). In contrast, no significant difference is found between the costs borne by the losing and winning bidders. Furthermore, we observe a negative correlation between the project size and the costs, while the relative competition fees for larger projects decrease.

Implications for Research/Policy:
Our research indicates that the Belgian PPP market is characterized by high entry costs. The present insufficient control or compensation may increasingly limit the attractiveness of the PPP market. Our results suggest that PPP contracts are particularly suitable for large infrastructure projects (capital value above 100 million euro), given the current bidding process and conditions, whereas smaller projects could better be bundled. In addition, we call for a bidding process with a shorter turnaround time and an efficient way of reducing bidders earlier in the process. As our findings demonstrate that the transaction costs potentially reduce the value creation of PPPs and the attractiveness of the market for private bidders, we call for more research on transaction costs of all stakeholders throughout the whole life cycle in the context of PPP performance, evaluation and policies.