Public Private Partnerships and Public Works: Reducing Moral Hazard in a Competitive Market

21 Pages Posted: 25 Jun 2007

See all articles by Biancamaria Raganelli

Biancamaria Raganelli

University of Rome Tor Vergata

Gianfrancesco Fidone

affiliation not provided to SSRN

Date Written: Juen 25, 2007

Abstract

The subject of this paper is the role of what are termed Public Private Partnerships for investments in infrastructures and of the connected relationship between Public Administration and Enterprises, also in the light of Community law on Public Contracts and Concessions and of the recent coming into force in Italy of the Code of Public Contracts (Decree Law 163 of 2006).

The aim is that of seeking mechanisms to improve the efficiency of single contracts by having recourse to the economic analysis law as a methodology of interpretation and, in particular, restoring the relationship between public administration and private partner to that of Principal-Agent. In this context the administration has to address basically two questions: in the first place, the selection of the private partner, and in the second place the stipulation of a potentially efficient contract, i.e. one able to induce the counterpart to bring its own interests into line with the administration's function of utility.

Regarding the first question, the Public Private Partnership is considered also under the aspect of the potential elusiveness of the principles and rules of competition as sanctioned at Community level. To provide incentives for the involvement of private capital for public purposes, on the one hand, administrations are tending to seek new contractual figures and more streamlined and flexible award procedures for the selection of the private counterpart, while on the other hand the lawmaker is endeavouring to introduce legislation to facilitate the pursuing of this aim. The question is however that of establishing the limits of admissibility and the premises of legitimacy of this process in harmony with the over-riding principles, at Community level, of safeguarding competition and equality of treatment among the various entrepreneurs. A current example is what is happening in Italy for the adoption of the institution - already in force in Community law - of competitive dialogue. Once the private partner has been selected, it is in the administration's interest to stipulate a good contract, which will satisfy its own utility function and which will induce the counterpart, by foreseeing incentives and sanctions, to fulfill it exactly. The relationship of collaboration between public administration and enterprise is characterized by interests that are potentially at odds, stemming from a structural incompleteness of the contract due to various causes: the construction of a complex, long-lasting contractual relationship and the need, for the public partner, to have to renegotiate its behaviour with the private partner, involving high transaction costs. Furthermore, the fact that the relationship contains information asymmetries leads to distortional phenomena of moral hazard, necessitating high monitoring costs to be borne by the public administration, as the less informed party. These effects have to be analysed to seek possible adjustment mechanisms, on the one side by an adequate system of incentives and on the other an adequate system of control, aimed at the construction of a basically efficient relationship.

Keywords: Public Private Partnerships, public works, information asymmetries, moral hazard, agency costs, principal-agent, competition, public administration, public contracts, concessions

Suggested Citation

Raganelli, Biancamaria and Fidone, Gianfrancesco, Public Private Partnerships and Public Works: Reducing Moral Hazard in a Competitive Market (Juen 25, 2007). Available at SSRN: https://ssrn.com/abstract=996375 or http://dx.doi.org/10.2139/ssrn.996375

Biancamaria Raganelli

University of Rome Tor Vergata ( email )

ROME, Lazio

Gianfrancesco Fidone (Contact Author)

affiliation not provided to SSRN ( email )

No Address Available

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