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Chapter Summary

Geddes, R. (2011). Public Private Partnerships in the Public Interest. In The Road to Renewal (120-136). Washington, D.C.: AEI. 


While generally supportive of the use of public-private partnerships in the US transportation sector, Geddes outlines important best practices and policy issues for public-sector officials to consider before entering into a PPP. According to Geddes, it is important to develop the appropriate “infrastructure of an institutional nature” in order to successfully benefit from these types of partnerships, as their initiation, negotiation, and management can be particularly complicated.  Geddes addresses five main issues to consider before engaging in PPPs in order to make the process more manageable.

(1) Gaining consensus from public-sector stakeholders

It is important, first, to determine whether or not citizens affected by the public-private partnership support it. This can be achieved through stakeholder studies, public hearings, and PPP-enabling legislation. Geddes recommends legislation, as it “defines the institutional setting” and provides piece of mind for companies that stakeholders will not hinder the partnership after the PPP process is already begun (121).

(2) Developing public-sector expertise

The use of PPPs requires public-sector employees to develop new skills related to, “the screening of bidders, contract negotiation, contract monitoring and enforcement, and…renegotiation”; these tasks should be performed in a manner that ultimately best protects the public interest (122).  Geddes suggests two ways to address issues related to expertise.  One option is to create an office exclusively for dealing with PPPs. Another option is for public-sector officials to consult with outside experts when needed.

(3) Ensuring the process is transparent

It is important for the PPP process to be transparent at all stages in order to ensure stakeholder acceptance. However, some private companies may be opposed to a completely transparent processes, fearing their competitors may use the contract or proposal transparency to their advantage, either free riding on their hard work or exploiting “company secrets” (122).

(4) Innovative auction approaches

Geddes describes an alternative to the standard maximum-concession-fee/minimum-toll approaches to auctions, the least present value of revenue auction (LPVR), which is superior in this context as it reduces risk for the private partner. LPVR allows firms to bid on a franchise based on the lowest value of the toll they’ll take. The concession then lasts as long as is necessary for their bid amount to be reached.

(5) Enforcing the contract

It is important for the public-sector sponsor to effectively monitor and enforce the PPP contract. Geddes stresses the need to pay close attention to contract design, emphasizing that “a clearly defined public entity that will objectively assess compliance with contractual responsibilities should be given a mandate to verify that private partners are upholding service quality” (124). Geddes recommends that contracts focus on quality standards as opposed to input use to ensure that citizen-customers’ needs are met.

In addition to the aforementioned critical considerations, Geddes raises a number of other policy issues related to PPPs that need to be accounted for.

Addressing market power

Dealing with market power can be challenging with respect to transportation. Geddes states that public partners should regulate tolls only when competition is limited. There are two main ways to regulate: rate-of-return regulation (RORR), which controls the private partner’s return on investment, and incentive regulation, which sets a price cap for tolls. Geddes recommends using incentive regulation as opposed to RORR, as RORR gives firms little incentive to focus on improved quality or efficiency and may cause firms to overcapitalize if the rate is based on the capital they put into the project. In contrast, incentive regulation that controls toll price encourages companies to focus on reducing costs and keeping customers satisfied.  With respect to incentive regulation, it may be necessary to set an average toll price over a certain time period in order to allow congestion prices to be set to reduce traffic during high travel times.

Non-compete/compensation clauses

It is not uncommon for PPP contracts to contain non-compete or compensation clauses, as firms may be reluctant to invest capital in a project if the public partner is able to develop a competing transportation service whenever they like (e.g. a “free” road). Non-compete clauses prevent public partners from developing these types of projects. More common than non-compete clauses are compensation clauses, which require the public partner to compensate the private partner for lost revenue in the event a competing facility is built.  These types of clauses may be viewed as securing monopoly power for the private partner or “constraining public officials”, so it is important to effectively communicate the reasoning for these clauses to public-sector stakeholders (131).

Concession/user-fee payments

Public partners must decide how to use concession payments/funds appropriately.  This may create a principal-agent problem where managers, who are responsible for how the uncommitted funds are spent, may be motivated to use the money in ways that do not best support the public interest (e.g. for projects that are beneficial for reelection campaigns).  One option may be to rebate the money directly to citizens. Another option is to contractually obligate concession funds to be spent on maintaining the PPP facility.

Ex post opportunism

Finally, Geddes addresses the issue of ex post opportunism (holdup problems). PPP contracts can often be relatively incomplete in addressing all potential eventualities due to the long time horizon necessary to assure investors that they will recover early losses in the future.  When some unforeseen problem arises that was unaccounted for in the contract, one partner may try to leverage for better terms.  With respect to transportation, assets like roads or bridges are specific to the public and private partners, which allows for either party to easily create holdup problems. In addition, there is always some risk on the part of the private party that some future government action may affect the PPP, as the government is legally barred from forgoing regulatory power. In order to ameliorate these issues, it is important that contracts remain flexible and are allowed to be modified or renegotiated, and that the public and private partners develop a good working relationship.