Date Added: Aug 2009
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. The authors show that existing accounting standards allow governments to renegotiate PPP contracts and elude spending limits. This model of renegotiations leads to observable predictions: In a competitive market, firms lowball their offers, expecting to break even through renegotiation, renegotiations compensate lowballing and pay for additional expenditure, governments use renegotiation to increase spending and shift the burden of payments to future administrations, and there are significant renegotiations in the early stages of the contract, e.g. during construction.