Working Paper: NBER ID: w15300
Authors: Eduardo Engel; Ronald Fischer; Alexander Galetovic
Abstract: Public-private partnerships (PPPs) are increasingly used to provide infrastructure services. Even though PPPs have the potential to increase efficiency and improve resource allocation, contract renegotiations have been pervasive. \n \nWe show that existing accounting standards allow governments to renegotiate PPP contracts and elude spending limits. Our model of renegotiations leads to observable predictions: (i) in a competitive market, firms lowball their offers, expecting to break even through renegotiation, (ii) renegotiations compensate lowballing and pay for additional expenditure, (iii) governments use renegotiation to increase spending and shift the burden of payments to future administrations, and (iv) there are significant renegotiations in the early stages of the contract, e.g. during construction. We use data on Chilean renegotiations of PPP contracts to examine these predictions and find that the evidence is consistent with the predictions of our model. Finally, we show that if PPP investments are counted as current government spending, the incentives to renegotiate contracts to increase spending disappear.
Keywords: Public-Private Partnerships; Renegotiation; Government Spending; Fiscal Accounting
JEL Codes: H21; L51; L91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| accounting standards (M48) | renegotiation practices (L14) |
| desire to increase infrastructure spending (H54) | renegotiations (L14) |
| renegotiations (L14) | additional expenditures (H76) |
| increased spending (H56) | likelihood of reelection (D72) |
| PPP investments categorized as current government spending (H59) | incentives for renegotiation (D86) |
| lowballing (D44) | need for renegotiation (D74) |
| renegotiation outcomes (C78) | pre-negotiation bidding strategies (D44) |
| government actions (H11) | timing of renegotiations (L14) |