Skip to main content
SpringerLink
Log in

How Much Vertical Integration? Contractual Choice and Public–Private Partnerships in the United States

  • Published:
Review of Industrial Organization Aims and scope Submit manuscript

Abstract

Efficiency gains in public–private partnerships (PPP) derive from risk transfer and the bundling of different tasks. We study the factors that explain bundling in single contracts. We focus on the choice between integrating operational tasks alone or construction tasks alone, versus vertically integrating both operational and construction tasks. We analyze a new data set that includes 553 PPPs that were concluded in the United States. We find evidence that some financial variables play a role in bundling decisions. In addition, market size and the type of economic sectors involved, are also important drivers of contract choice and bundling decisions.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. See Chong et al. (2006) and Cruz et al. (2014) for recent papers on PPP’s experiences in different sectors.

  2. Traditional procurement refers to a design–bid–build (DBB) contract. Project design is placed out for bid, and construction of that design is bid out separately. The public sector finances operation and maintenance of the project over its life. Smaller traditionally delivered projects may not be bid out at all. DBB projects thus incorporate no bundling, and are not considered to be PPPs.

  3. Project developers are companies that take transportation improvements from concept through the design and construction phases. Examples include ACS Group/Hochtief (Spain), Macquarie Group (Australia), Vinci (France), and Flour (U.S.).

  4. PWF is the only newsletter to conduct such regular rankings. Numerous testimonials as to its influence and respect in the industry are available upon request.

  5. The PWF database includes information on PPP projects only. There are many more projects that are completed under traditional (i.e., DBB, or non-PPP) delivery. Obtaining comprehensive data on traditionally delivered projects is very difficult. See, e.g., Flyvbjerg et al. (2003).

  6. In a BOT contract, a private entity receives a concession from the public sector to finance, design, construct, and operate a facility for an agreed-upon period. Operation is transferred back to the public sector at the end of the concession period. Close relatives of the BOT contract are the Build–Own–Operate (BOO), in which the private partner owns the facility for a time, and the Build–Transfer–Operate (BTO), in which the private partner owns the facility for the construction phase only, transfers ownership to the public sponsor, and commences operation.

  7. PPP tendering periods can be long and the contracting process costly. Procurement costs can be between 5 and 10 % of total capital costs (Yescombe 2007). Moreover, the relative impact of procurement costs rises as the project’s capital value declines. High transaction costs are thus a significant barrier to greater vertical integration for low capital-value projects. Overall, the relationship between capital value and the probability of choosing a PPP is likely to be non-linear.

  8. A more general term for positive externalities would be that of 'complementarities', which imply that the marginal profitability of one action increases with the level of another (Lafontaine and Slade 2012, p. 1001).

  9. This occurs in prison provision, for example, where a better infrastructure design may reduce operational costs for a given safety level (Martimort and Pouyet 2008).

  10. Airports offer an example: The complexity that is created by innovation requires that new procedures and sophisticated management tools be learned and adopted (Martimort and Pouyet 2008).

  11. Lease contracts with improvements imply that the lease included a commitment to undertake new investments in the existing facility. Joint development agreements refer to PPPs that were undertaken by joint venture companies with equity contributed by the private and public sectors (see Moszoro and Gasiorowski 2008).

  12. We define the management of an infrastructure facility as including both operation and maintenance.

  13. Recall that this category includes sport stadiums, schools, street lights, post offices, and parking, among others.

  14. All financial variables are in constant US$. We deflate to 1984 as the base year for the regional CPI estimates. Because there is not official estimation of CPI for many states we use regional CPI 1982–1984 and apply it to the states in the region.

  15. Model (1) includes a time-trend variable (Year). We also considered models with year dummy variables. These show consistent results for financial, economic sector, and control regressors. Such models, however, return negative values in the McFadden Pseudo-R2, which suggests a poor fit. We thus report models with time trends.

  16. We considered State fixed effects (separately), but the maximum likelihood method did not converge.

  17. The Hausman test for the independence of irrelevant alternatives (IIA) supports the null hypothesis of Odds (Outcome-J vs. Outcome-K) being independent of other alternatives in all models with different categories.

References

  • Albalate, D. (2014). Privatisation and nationalisation of European roads. Success and failure of public–private partnerships. Cheltenham: Edward Elgar.

    Google Scholar 

  • Asian Development Bank. (2008). Public–private partnerships handbook. Manila: ADB.

    Google Scholar 

  • Auriol, E., & Picard, P. M. (2013). A theory of BOT concession contracts. Journal of Economic Behavior & Organization, 89, 187–209.

    Article  Google Scholar 

  • Bennett, J., & Iossa, E. (2006). Building and managing facilities for public services. Journal of Public Economics, 90(10–11), 2143–2160.

    Article  Google Scholar 

  • Bentz, A., Grout, P. A., & Halonen, M. L. (2004). What should governments buy from the private sector—Assets or services? Mimeo.

  • Brown, T., Potoski, M., & Van Slyke, D. (2005). Transaction costs and contracting: The practitioner perspective. Public Performance & Management Review, 28(3), 326–351.

    Google Scholar 

  • Chong, E., Huet, F., Saussier, S., & Steiner, F. (2006). Public–private partnerships and prices: Evidence from water distribution in France. Review of Industrial Organization, 29(1–2), 149–169.

    Article  Google Scholar 

  • Commission, European. (2003). Public finances in EMU 2003. Brussels: European Commission.

    Google Scholar 

  • Cruz, C., Marques, R. C., & Cardoso, P. (2014). Empirical evidence for renegotiation of PPP contracts in the road sector. Journal of Legal Affairs and Dispute Resolution in Engineering and Construction, 7(2), 05014003.

    Article  Google Scholar 

  • Engel, E., Fischer, R., & Galetovic, A. (2014). The economics of public–private partnerships. A basic guide. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Flyvbjerg, Bent, Bruzelius, Nils, & Rothengatter, Werner. (2003). Megaprojects and risk: An anatomy of ambition. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Geddes, R. R., & Wagner, B. L. (2013). Why do states adopt public–private partnership enabling legislation? Journal of Urban Economics, 78, 30–41.

    Article  Google Scholar 

  • Hart, O. (2003). Incomplete contracts and public ownership: Remarks, and an application to public–private partnerships. Economic Journal, 113(486), C69–76.

    Article  Google Scholar 

  • Hart, O., Shleifer, A., & Vishny, R. W. (1997). The proper scope of government: Theory and an application to prisons. Quarterly Journal of Economics, 112(4), 1127–1161.

    Article  Google Scholar 

  • Hodge, G. A., Greve, C., & Boardman, A. E. (2010). Introduction: the PPP phenomenon and its evaluation. In G. A. Hodge, C. Greve, & A. E. Boardman (Eds.), International handbook of public–private partnerships (pp. 3–16). Cheltenham: Edward Elgar.

    Chapter  Google Scholar 

  • Iossa, E., & Martimort, D. (2012). Risk allocation and the costs and benefits of public–private partnerships. RAND Journal of Economics, 43(3), 442–474.

    Article  Google Scholar 

  • Iossa, E., & Martimort, D. (2015). The simple microeconomics of public–private partnerships. Journal of Public Economic Theory, 17(1), 4–48.

    Article  Google Scholar 

  • Lafontaine, F., & Slade, M. E. (2012). Interfirm contracts: Evidence. In R. Gibbons & J. Roberts (Eds.), Handbook of organizational economics (pp. 958–1013). Princeton: Princeton University Press.

    Google Scholar 

  • Martimort, D., & Pouyet, J. (2008). To build or not to build: Normative and positive theories of public–private partnerships. International Journal of Industrial Organization, 26(2), 393–411.

    Article  Google Scholar 

  • Moszoro, M., & Gasiorowski, P. (2008). Optimal capital structure of public–private partnerships. IMF Working Paper 1/2008. Washington, DC: International Monetary Fund.

  • Yescombe, E. (2007). Public–private partnerships principles of policy and finance. Burlington, MA: Butterworth-Heinemann, Elsevier.

    Google Scholar 

Download references

Acknowledgments

This work was supported by the Spanish Government (ECO2012-38004); the Catalan Government (SGR2014-325), and the ICREA-Academia program of the Catalan Government. We are grateful to Bill Reinhardt, the editor of Public Works Financing Newsletter, for providing us with access to his database, and also for his detailed information on how the data base is built.

Author information

Authors and Affiliations

  1. Department of Applied Economics, University of Barcelona, John Maynard Keynes 1-11, 08034, Barcelona, Spain

    Daniel Albalate

  2. Department of Applied Economics, University of Barcelona, John Maynard Keynes 1-11, Office 6034, 08034, Barcelona, Spain

    Germà Bel

  3. Department of Policy Analysis and Management College of Human Ecology, Cornell University, 251 Martha Van Rensselaer Hall, Ithaca, NY, 14853, USA

    R. Richard Geddes

Authors
  1. Daniel Albalate
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Germà Bel
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. R. Richard Geddes
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Daniel Albalate.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Albalate, D., Bel, G. & Richard Geddes, R. How Much Vertical Integration? Contractual Choice and Public–Private Partnerships in the United States. Rev Ind Organ 51, 25–42 (2017). https://doi.org/10.1007/s11151-016-9540-1

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11151-016-9540-1

Keywords

JEL Classification

Search

Navigation