TY  - JOUR
AU  - Engel,Eduardo
AU  - Fischer,Ronald
AU  - Galetovic,Alexander
TI  - Soft Budgets and Renegotiations in Public-Private Partnerships
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15300
PY  - 2009
Y2  - August 2009
UR  - http://www.nber.org/papers/w15300
L1  - http://www.nber.org/papers/w15300.pdf
N1  - Author contact info:
Eduardo Engel
Yale University
Department of Economics
P.O. Box 208268
New Haven, CT  06520-8268
Tel: 203/432-5595
Fax: 203/432-5779
E-Mail: eduardo.engel@yale.edu

Ronald Fischer
Centro de Economia Aplicada (CEA)
Departamento de Ingenieria Industrial
Universidad de Chile
Republica 701 Santiago CHILE
E-Mail: rfischer@dii.uchile.cl

Alexander Galetovic
Fac. Cs. Economicas y Empresariales
Universidad de Los Andes
Av. San Carlos de Apoquindo 2200
Santiago CHILE
E-Mail: alexander@galetovic.cl
AB  - 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.

We show that existing accounting standards allow governments to renegotiate PPP contracts and elude spending limits. Our model of renegotiations leads to observable predictions: (i) in a competitive market, firms lowball their offers, expecting to break even through renegotiation, (ii) renegotiations compensate lowballing and pay for additional expenditure, (iii) governments use renegotiation to increase spending and shift the burden of payments to future administrations, and (iv) there are significant renegotiations in the early stages of  the contract, e.g. during construction. We use data on Chilean renegotiations of PPP contracts to examine these predictions and find that the evidence is consistent with the predictions of our model. Finally, we show that if PPP investments are counted as current government spending, the incentives to renegotiate contracts to increase spending disappear.
ER  -