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Contract design to prevent underinvestment in Public-Private-Partnerships

Ågren, Robert LU (2011) CIB TG72 /ARCOM Public Private Partnerships In [Host publication title missing] p.107-118
Abstract
Underinvestment happens when an investor abstain from investing in an asset, even if the investment is beneficial for the customer, because it does not perceive a profitable return on the specific investment. The risk for underinvestment is high in projects which rely on high asset specificity and towards the end of contract lifespan. This paper builds upon a qualitative analysis of documentation around a multimillion dollar construction project, where contractual mechanisms are investigated to determine if they could prevent underinvestment due to high asset specificity. The study shows that underinvestment in the project is prevented by unilateral options for the public authority to buy the property at different milestones during the... (More)
Underinvestment happens when an investor abstain from investing in an asset, even if the investment is beneficial for the customer, because it does not perceive a profitable return on the specific investment. The risk for underinvestment is high in projects which rely on high asset specificity and towards the end of contract lifespan. This paper builds upon a qualitative analysis of documentation around a multimillion dollar construction project, where contractual mechanisms are investigated to determine if they could prevent underinvestment due to high asset specificity. The study shows that underinvestment in the project is prevented by unilateral options for the public authority to buy the property at different milestones during the contractual lifespan. In addition there are joint project groups to implement a concept of partnering to reduce asymmetric information during investment decisions. In conclusion, the contract gives the impression of dealing with underinvestment. Nevertheless, there are some draw backs due to the financial setup of the public authority and it exposes the private party to some contractual risks due to high asset specificity which could risk underinvestment. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Chapter in Book/Report/Conference proceeding
publication status
published
subject
keywords
Economic analysis of law, Procurement, Contracting, Public-private partnership
in
[Host publication title missing]
editor
Akintoye, Akintola; Liyanage, Champika and Renukappa, Suresh
pages
107 - 118
publisher
University of Central Lancashire
conference name
CIB TG72 /ARCOM Public Private Partnerships
ISBN
9781901922813
language
English
LU publication?
yes
id
2a2dd1cc-409a-4b78-bb0d-031be463c877 (old id 2335753)
date added to LUP
2012-02-01 08:32:31
date last changed
2016-04-16 07:59:15
@misc{2a2dd1cc-409a-4b78-bb0d-031be463c877,
  abstract     = {Underinvestment happens when an investor abstain from investing in an asset, even if the investment is beneficial for the customer, because it does not perceive a profitable return on the specific investment. The risk for underinvestment is high in projects which rely on high asset specificity and towards the end of contract lifespan. This paper builds upon a qualitative analysis of documentation around a multimillion dollar construction project, where contractual mechanisms are investigated to determine if they could prevent underinvestment due to high asset specificity. The study shows that underinvestment in the project is prevented by unilateral options for the public authority to buy the property at different milestones during the contractual lifespan. In addition there are joint project groups to implement a concept of partnering to reduce asymmetric information during investment decisions. In conclusion, the contract gives the impression of dealing with underinvestment. Nevertheless, there are some draw backs due to the financial setup of the public authority and it exposes the private party to some contractual risks due to high asset specificity which could risk underinvestment.},
  author       = {Ågren, Robert},
  editor       = {Akintoye, Akintola and Liyanage, Champika and Renukappa, Suresh},
  isbn         = {9781901922813},
  keyword      = {Economic analysis of law,Procurement,Contracting,Public-private partnership},
  language     = {eng},
  pages        = {107--118},
  publisher    = {ARRAY(0xa8d79e0)},
  series       = {[Host publication title missing]},
  title        = {Contract design to prevent underinvestment in Public-Private-Partnerships},
  year         = {2011},
}