NO : WP-2018-012
AUTHOR : Chandan Kumar
TITLE :Opportunism and Hold-up in the Incomplete Public Private Partnership (PPP) Contracts
Opportunism is a concern for contracts that are incomplete in the presence of bounded rationality and uncertainty. Since Public Private Partnership (PPP) contracts are incomplete, are these contracts prone to opportunism? This paper attempts to find the answer to this question. It examines the contract design of the Indian PPP road contracts and analyzes its strengths and weaknesses to avoid the opportunism or hold-up using the probabilistic framework. This framework suggests that each type of contract should have its own self-enforcing range to make it incentive compatible. This paper compares the risk allocated in the two types of contracts (i.e. linked and delinked contracts) for delivering the project on time. Further, it empirically tests these findings using 82 PPP projects. The low probability of timely completion and longer time overruns in the delinked projects indicate the presence of possible opportunism. A further analysis of delinked contracts shows that the same set of companies (which have both types of contracts in their portfolio) could exploit the incorrectly specified delinked contract to create a hold-up like situation. In consonance with the contract theory, the analysis suggests that extra leverage should be given with more accountability and better checks.
Keywords : Opportunism, Hold-up, Contracts, Public Private Partnership, India
JEL Code : D86, L14, L33, O22
NO : WP-2018-013
AUTHOR : Chandan Kumar
TITLE :Role of Bidding Method and Risk Allocation in the Performance of Public Private Partnership (PPP) Projects
The Public Private Partnership (PPP) model has recently gained a lot of attention in the infrastructure creation literature. Selection of the right private partner in PPP is important for the success of this model. The bidding method along with appropriate risk allocation plays a critical role in this regard. This paper analyses the Indian PPP framework, including its bidding process and the standard concession agreement. The paper argues that the existing bidding method (i.e. premium/grant based method) can result in over-valuation of the projects due to optimism bias. When optimism about high traffic volumes do not materialize in the long run, projects could come under stress or fail, which is quite visible for Indian PPP road projects. This paper discusses an alternative bidding method called least present value of revenue (LPVR) and compares this method for the Indian PPP set-up with the help of Monte Carlo simulations by creating various real-life kind of scenarios. Results show that both methods have their own advantages depending on what was expected and what is actually realized. If expectations are low, then both methods gives more or less competitive results, but as expectations increase the LPVR method starts giving better results with a reasonably high certainty.
Keywords : Public Private Partnership, Road Sector, Bidding Method, Contract Design, Monte Carlo Simulation, Sensitivity Analysis
JEL Code :D44, H54, C15
NO : WP-2018-014
AUTHOR : Chandan Kumar
TITLE :Effects of Contract Governance on Public Private Partnership (PPP) Performance
Using the basic instruments of governance as highlighted in the transaction cost economics literature, this paper empirically examines the impact of differences in contract attributes on project outcomes. The hypothesis is to test whether better incentive structure and stricter administrative controls lead to more efficient project outcomes. It compares two sets of contracts (called as toll and annuity) from Indian PPP road projects which are designed for the same task and implemented under the similar conditions, but have some differences in the contract governance attributes. It carries out this exercise using data from more than 150 projects. The empirical findings highlight how instruments of governance influence the degree of efficiency in achieving the desired results. For instance, the annuity model, that has tighter budget constraint (i.e. better incentive structure) than the toll model, performs better in terms of minimizing cost and time overruns. Moreover, the results demonstrate that changes in administrative controls also influence outcomes. Stricter the control, better is the efficiency in the desired outcomes. The empirical findings could be useful to the policymakers for designing better contracts for the road as well as other infrastructure related sectors.
Keywords : Contracts, Transaction Cost Economics, Road sector, Public Private Partnership, India
JEL Code : K12, D23, R42, L33, C20