Homework answers / question archive / AN EMPIRICAL STUDY OF AN INTEGRATED THEORY OF TRANSACTION COST ECONOMICS AND REAL OPTIONS TO INCREASE FLEXIBILITY IN PUBLIC-PRIVATE PARTNERSHIP A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy Civil Engineering and Built Environment School Science and Engineering Faculty Chapter 1: Introduction 1

AN EMPIRICAL STUDY OF AN INTEGRATED THEORY OF TRANSACTION COST ECONOMICS AND REAL OPTIONS TO INCREASE FLEXIBILITY IN PUBLIC-PRIVATE PARTNERSHIP A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy Civil Engineering and Built Environment School Science and Engineering Faculty Chapter 1: Introduction 1

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AN EMPIRICAL STUDY OF AN INTEGRATED THEORY OF TRANSACTION COST ECONOMICS AND REAL OPTIONS TO INCREASE FLEXIBILITY IN PUBLIC-PRIVATE PARTNERSHIP

A thesis submitted in partial fulfilment of the requirements for the degree of

Doctor of Philosophy

Civil Engineering and Built Environment School

Science and Engineering Faculty

Chapter 1: Introduction

1.1 BACKGROUND OF RESEARCH

1.1.1 Global Economic and Trends in Private Participation in Infrastructure

Our global population continues to surge, with a forecast of a 25 percent increase by

2040. The growth in population increases the potential for economic growth, but also puts further pressures on the existing urban infrastructure. The challenge for governments is to deliver quality purposeful infrastructure that gives communities what they need - not only to survive but to thrive (Global Infrastructure Hub, 2018). Infrastructure provides the bedrock of economic development and social well-being. It facilitates efficient transport for the movement of people and goods. It provides essential utilities, such as energy, water and waste. It delivers education, health, and judicial functions. It supports entertainment and leisure. McKinsey 2016 study estimates that the world needs to invest about $3.3 trillion, or about 3.8 percent of global GDP, annually to meet population growth by 2030 (Woetzel, Garemo, Mischke, Hjerpe, &

Palter, 2016). Others provide similar estimates (Hub, Global Infrastructure; Economics,

Oxford;, 2017). Asia has the largest overall needs, accounting for some 54 percent of the global infrastructure investment, compared to 22 percent for the Americans, the next largest region. Before the global health pandemic hit the world, countries worldwide already face a massive infrastructure investment shortfall. According to the Global Infrastructure Outlook

(2017), the total current global infrastructure investments are $79 trillion, while the investment needed to be $94 trillion. This leaves the world facing significant gaps of $15 trillion against expected spending for the period 2016 to 2040. Governments were already struggling to match their present and future infrastructure needs with requisite investments. Deloitte 2020 study estimates that an additional $5 trillion to $10 trillion of investments is needed over the next few years due to the COVID-19 economic stimulus to support the global economic growth and fill gaps in infrastructure. Since the third quarter of 2019, declining revenues coupled with costly pandemic relief measures have added $20 trillion to global debt. The infrastructure sector faced

such an extreme set of challenges concurrently. By the end of 2020, economists expect global

debt to reach $277 trillion, or 365% of world GDP. The coronavirus pandemic is driving global

government on the cusp of becoming more indebted.

Facing constraints on public resources and fiscal space, governments are increasingly

turning to the private sector as an alternative source of funding the infrastructure funding

demands (World Bank, 2015). The private sector’s participation in infrastructure investments

is crucial, especially to help in overcoming budget constraints. Governments world-wide have

sought value for money by augmenting the traditional approach to public infrastructure

delivery and management by introducing private capital – which is where project finance

model, broadly termed public-private partnerships (PPPs) and Regulated Asset Based (RAB)

come in (Makovšek & Veryard, 2016).

1.1.2 PPP Growth and Challenges

The global financial crisis of 2008 brought about renewed interest in PPPs. This mode of

procurement leverages limited public funding by bringing in private sector finance, innovation,

and technology to provide high-value public services through improved operational

productivity. Improving the delivery of infrastructure and utilities through higher levels of

productivity and value is thought to lead directly to poverty reduction and economic growth

(World Bank, 2015). PPP is a mode of delivery that attempts to improve the value for money

(VfM) of public service delivery compared to the traditional model of public procurement.

PPPs are situated in between the traditional public procurement and private party provision

(OECD, 2008). The mode of service delivery ranges from traditional public procurements

where the government procures the goods and services from the private sector, to private party

delivery where the public sector is not involved. The fundamental difference between

conventional public procurement and PPP procurement for capital investment relates to which

party raises finance for the asset’s construction. In conventional procurement, private

contractors build the asset but the public sector provides the finance. When the public sector

procures an asset using PPP, a private company – also called a special purpose vehicle (SPV)

– is formed which raises finance through debt and equity. Once the asset is constructed and

available for use, the taxpayer makes ‘unitary charge’ payments to the SPV over the contract

term which usually is about 25 to 30 years. The charge includes debt and interest repayments,

shareholder dividends, asset maintenance, and in some cases other services such as cleaning

(NAO, 2018).

There are two main contract types for delegating public services to private sector

operators: (i) contracts where private providers bear no demand risk and the payments to the

private provider are service payments paid by the procuring authority according to performance

criteria; and (ii) contracts where private providers bear all demand risk and the payment

depends on the actual service demand. There are two categories of PPPs in Australia. First,

there is economic infrastructure PPP, also called ‘user-funded PPP’. Here, the primary source

of funding that pays the private sector takes the form of the revenue earned through user

charges, such as toll roads or charges for the use by the public community of facilities that

produce income such as tunnels, airports, roads, ports, trains/trams, and bridges. The second

type is social infrastructure PPP, also called government-funded PPP or service-payment PPP.

Here, the primary source of funding takes the form of direct payment (availability payments)

from the government. This model has typically been used for non-income producing

infrastructure, such as hospitals, schools, prisons, and museum (Department of Infrastructure

and Regional Development, 2008). Both the economic and social infrastructure PPPs share the

common objective of achieving lower economic costs when compared to the traditional public

procurement methods.

Despite the extensive benefits and expanding use of PPPs, there are significant criticisms

of the use of PPPs, struggling to meet even a small portion of the overall infrastructure

investment globally. The UK and Australia make the most use of PPPs, at approximately 15

percent of overall infrastructure investment (Sansom, 2016). Remaining OECD countries use

of PPPs is near to zero (Hall, 2015). John Fitzgerald contends that numerous issues are

encountered in the delivery of PPP models in Australia, including a lack of political will, state

government bureaucracies with differing ideologies, government lack of experienced in

administering PPPs, high premium by shifting too much risk to the private sector (cited in

Sansom, 2016). According to PwC (2017), most of the failed PPPs in Australia have been

user-pay PPPs, particularly in the transport sector where the revenue generated by the project

is well below that forecasted by the consortium’s investors, leading to the insolvency of the

SPV. PPPs have been criticised in the wake of several high-profile failures, including Lane

Cove Tunnel, Adelaide-Darwin railway projects, Sydney’s cross city tunnel, Brisbane’s Clem

7 tunnel and the consortium building the Ararat Prison in Victoria (Menezes, 2012). The

downside of PPPs for government is that equity investors and debt financiers are starting to

lose their appetite for demand risk on user-pay PPPs transport projects. This has forced

government to use availability-type PPPs under which the government bears the demand risk.

Most of the transport projects in Australia have started to delivery availability-type PPPs,

including Peninsula Link, North East Link, Western Roads Upgrade, Metro Tunnel Project and

Cross River Rail.

The UK has been a global leader in the implementation of Private Finance Initiative

(PFI)/ PPP projects since the early 1990’s. PPPs have been traditionally engaged in

transportation infrastructure but has gradually extended in the late 1990’s to other sectors,

including waste management, hospital facilities, educational, prisons, leisure facilities,

healthcare, IT services and military training (OECD, 2008; Iossa & Martinmort, 2015). There

are currently over 700 operational PF1 and Private Finance 2 (PF2) deals, with a total capital

value of around £60 billion. Annual charges for these deals amounted to £10.3 billion in 2016-

17. Even if no new deals are entered into, future charges will continue until 2040, amount to

£199 billion (NAO, 2018). Pollock, Price & Player (2007) claim that the case supporting PPPs

in the UK has failed to stack up. VfM benchmarking by the UK finance ministry (the Treasury)

against a Public Sector Comparator (PSC) was “not evidence based, but biased towards PFI”.

A 2015 review by the UK National Audit Office finds that investment through PFI schemes

cost more than double what it would cost if the government had borrowed the money directly,

which does not include the cost of paying private company’s profit under PFI. Many criticism

about the lack of transparency has been directed at UK PPPs. Her Majesty’s Treasury indicated

in National Audit Office (NAO, 2018) that most of the PFI projects in the UK are recorded as

“off-balance sheet” for accounting purposes, to give the impression of prudent financial

management. Under European System of Accounts (ESA) 95, PFI debt does not appear in UK

debt statistics, which suggests that the investment under PFI does not count as an upfront cost

in departmental capital budgets. This is no longer the case with the introduction of ESA 2010

(implemented in 2014) which classify nearly all PPP projects as “on-balance sheet”.

1.1.3 Market failure and hold-up problems

The experience of the public sector with PPPs has not always been positive. Increasing

criticism about the lack of efficiency and validity of the PPP arrangement (references??). None

of the contract agreements were crafted well enough to predict future contingencies,

particularly in PPP contracts with long lifecycles subject to endless anticipated events affecting

the project performance and outcome of the project efficiency. Given the length and complexity

of PPP arrangements, PPPs cost decisions always involve various degrees of risk and

uncertainties that may lead to high prices in tender and capital cost variations. Cruz and

Marques (2013) indicated that the investment in long-term PPP projects comprises of risk and

uncertainty particularly on capital cost, demand cost, and construction cost. It is important to

identify and assess the inherent risk underlying PPP project in minimising the capital cost and

maximising the potential investment opportunities. Some strident criticism on PPPs

procurement allied with uncertainty leads to market failure. Henjewele et al. (2011) discuss the

variation in time, cost and requirements of projects affected by the overall performance of the

PPP across its life-cycle created post-contract market failure. Variation in contract is the key

driver of market failure. Contract variations are closely connected with PPP arrangement and

relates to the creation of mechanisms to enable changes to the PPP contracts. Such changes

may be necessary as a result of a change in circumstances that could not be anticipated or

quantified when the PPP contracts was signed. Audits of PPPs in Victoria, Department of

Treasury and Finance (2014) reveal costly variations that might be the result of systemic events

(exogenous uncertainty). For example, the demand risk (forecasting error) for PPP projects has

been a persistent problem over time. Sydney Cross City, Lane Cove, Clem 7 and Airport Link

all suffered below forecast patronage leading to their financial collapse.

Table 1:- PPP Transport variation cost

Project Year Open Original Cost

($m)

Real Cost

(as at 2015 $m)

Sydney Cross City Tunnel 2005 $680 $967

Sydney Lane Cove Tunnel 2007 $1,100 $1,414

Brisbane Clem 7 Tunnel 2010 $3,200 $3,493

Brisbane Airport Link 2012 $4,800 $5,288

Adapted from (Elaurant & Louise, 2015)

Variations may involve changes to works, services or the form of delivery. The project

scope across PPPs are substantial in delivering long-term facilities and services. Therefore, the

complexity of the PPP procurement process increases the risks and uncertainties in the project

resulting in an incomplete contract. Giving existing contractual incompleteness, PPP projects

are later subject to expensive renegotiations and lengthy hold-up problems. Renegotiations

have raised some strident criticism on the viability of the PPPs approach. Renegotiations

provide room for opportunistic behaviour such as the hold-up problem when one party makes

a sunk investment and subsequently engages in bargaining with the counterparty. Therefore,

the transaction party can be easily held up by the counterparty to appropriate quasi-rent from

the sunk investment (Roemer, 2004).

Klein, Crawford, and Alchian (1986) discover the possibility of opportunistic behaviour

that occurs in the presence of appropriable quasi-rents of specialised assets. They define the

quasi-rent value of an asset as the excess of its value over the value in the next best use of the

asset. The term “opportunism” is credited to the work of Oliver Williamson (1985) who defined

it as “a condition of self-interest seeking with guile.” Love (2010) noted that opportunism gives

rise to transaction costs from the need of one party to protect against the likelihood of a

potential loss that may arise from the opportunistic behaviour of the other party. The Channel

Tunnel Rail Link project was initially favourable with the bidder that required the smallest

government grants. However, the generous promised made by the successful bidder proved to

be untenable. The reason behind the least recourse to public finance seems to have lead to holdup demands at the post-contract phase. The additional costs involved in disputes settlement and

the concessions made by the government significantly undermined the economic rationale for

seeking private capital to finance the public projects. Hold-up problem also occur in other

major projects, such as the London Underground PPP project (Metronet and Tube Line),

National Physical Laboratory PFI project, and West Coast Major Line Upgrading project

(Chang, 2013). The hold-up problem is the negative opportunistic behaviour in the deployment

of an imbalance of power in a contract. It argues that the party that has more power may allocate

the risk unexpectedly to the dependent party based on the opportunism behavioural. The party

with more power in the interaction behaves opportunistically to hold-up the other dependent

party. The hold-up problem is thus affected by the bargaining position of either party.

Emerson (1962) identified dependency as the basis of power. When one party becomes

dependent on the counterparty, the counterparty has power over the dependent party. In other

words, the more dependent one party to the counterparty, the more power becomes unbalanced.

When power is asymmetrical it leads to more potential for the hold-up problem to occur. Take

the example of an availability-type PPP (AT-PPP) as an example. The government signs a

bundled contract with the PPP-company to design, construct, finance, operate and maintain say

ten schools. The ten schools are expected to be built in two stages. The Government may be

exposes to the risk of hold-up by recognising the need for significant modification of the key

parameters of the contract, including the timing, scale and scope of works. The PPP-company

may exercise hold-up, with the Government facing significant transaction and political costs

from re-assigning the PPP-company, or change the form of contract. Figure 1 presented the

potential of hold-up arising in an AT-PPP contract when the Government becomes more

dependent on the PPP-company and is exposed to the risk of hold-up.

Figure 1 Hold-up problem in Availability-Type PPP

 The hold-up problem is the dominant economic theory subject to the well-developed

framework of Transaction Cost Economics (TCE), concerning the relationship management on

an appropriate contractual commitment. Opportunism is the central concept in TCE causing

transaction costs to rise. Godfrey and Hill (1995) explain the issue with unobservable

phenomena, in particular negative opportunistic behaviour associated with hold-up in TCE.

Habimana (2016) analysed Williamson’s view of transaction costs are the result of misaligned

incentives attributable to the opportunistic nature of contracting parties. The parties that have

more information can take advantages during transactions and misappropriate quasi-rents.

According to Rese and Roemer (2004), TCE are safeguarding mechanisms to protect the

partners against the hazards of opportunism behaviour, in particular hold-up. The focus on

opportunism as a behaviour kind of uncertainty has resulted in a strong emphasis on the benefits

of safeguarding through contractual commitment (Williamson, 1983; Rese & Roemer, 2004)

or government structure (Klein, Crawford, & Alcian, 1978; Williamson, 1985; Rese & Roemer,

2004). However, an isolated view of TCE is insufficient in dynamic environments due to its

narrow focus on opportunism behaviour uncertainty is an endogenous factor. Behaviour

uncertainty in TCE has driven the need for flexibility in PPP contracts where the government

upholds exogenous factor such as available budget and change in demographics. The need for

flexibility mainly helps the government pre-empting hold-up when the government is in urgent

need of significant modification to the existing contract terms in AT-PPPs.

 Roemer (2004) presents a comparison of real option (RO) analysis and TCE reveals

some parallels as well as differences. The key difference for both approaches are the origins of

uncertainty. TCE concentrates on the safeguarding aspects of governance structures to reduce

Exposes

Hold-up

Exercise

Hold-up

Private-Sector Public-Sector

Availability-Type PPP

behavioural uncertainty, while the ROs approach mainly treats environmental types of

uncertainty. The integration of TCE and ROs study is not novel (Barney & Lee, 2000; Folta,

1998; Sanchez, 2000). Previous research either focuses on an abstract discussion of real options

implications in TCE (Barney & Lee, 2000; Sanchez, 2000) or submits positive hypothesis

derived from TCE and real options considerations to empirical tests (Folta, 1998). Yet, the

integration of TCE and ROT has not been applied to the issue of hold-up in AT-PPPs. To

rectify this, the purpose of my thesis is to present an empirical test of a novel integrated

theoretical framework of TCE and ROT designed to explain how ROT can be used to increase

the flexibility of AT-PPP contracts to mitigate hold-up arising from PPP companies in AT-PPP

contracts.

 

1.2 RESEARCH AIM AND OBJECTIVES

1.2.1 Research aim and motivation

The aim of my thesis is to develop a practical guidance on how ROA can be used in an

availability-type PPP school project to reduce market failure and deliver better VfM. In doing

so, I intend to develop a theoretical framework that will assist managers to identify where and

when opportunities to create real options exist. The specific research objectives are as follows:

1. To integrate TCE and ROT to develop how ROA can be applied to an availability type of

PPP school including criteria for selecting viable ROs;

2. To deploy TCE transaction attributes to develop a new theoretical framework of RO,

including identifying and developing the dimensions of RO;

3. To develop a research plan to test the propositions associated with the new theoretical

framework of ROs;

4. To identify the type of RO that best suits the criteria for viable ROA in availability type of

PPP schools; and

5. To collect data and run simulations in accordance with the research plan to test the newly

developed theoretical framework.

1.3 THE MOTIVATION FOR MY RESEARCH IS BOTH THEORETICAL AND

PRACTICAL

Numerous studies have been undertaken to characterise ROs application in infrastructure.

A literature review undertaken of the extant research shows RO papers published between 2002

and 2017 contributed mostly to transport infrastructure. There is minimal application to the

social infrastructure and availability-type PP. More fundamentally, ROT is underdeveloped

with no formal theoretical framework to assist managers to identifying opportunities to create

ROs. The intergovernmental report on advancing private investment and financing into

infrastructure (ITF, 2018), focusses on reducing endogenous uncertainty and avoiding high

prices pre-contract, exogenous and systematic uncertainty and the issue of costly hold-up in

post-contracts are ignored. Other than that, the guidelines from State of Victoria (Department

of Treasury and FInance, 2018) mention hold-up cost but do not provide any guidance on how

to implement RO in availability-type PPP.

1.4 THESIS OUTLINE

Chapter two provides a comprehensive literature review focusing on the relationship between

TCE and ROT on the issue of hold-up. Chapter three present the core contribution of my

research in developing the relationship between TCE and ROT into a new integrative

theoretical framework. Chapter four discusses the design of the empirical study to test the

framework’s hypothesis, followed by a discussion of the empirical findings. Finally, Chapter

five provides a summary and conclusions, implications of the findings, research limitations and

recommendations for future research.

 

Dot Points Notes that need to be included in the body

Introduction

? We can start with some facts and figures on the $90 trillion plus demand for new

infrastructure across the globe over next 30 years.

? Facts and figures on how many countries around the globe are already drenched in debt

and constrained in terms of raising taxes and borrowing to fund new infrastructure, and

so there is a funding crises.

? Not surprising then that government are seeking private investment to fill this funding

gap.

? PPP is one source of private investment and finance (others including Regulated Asset

Base model).

? Some facts and figures on the use of PPPs and the appetite for PPPs to show PPPs as the

dominant model of engaging the private sector.

o Including proportion of user pays PPPs and availability-based PPP

? Given this dominance of PPPs, explain what appears to be an apparent paradox in PPPs

i.e. they are receiving enormous amount of criticism and particularly from the UK (the

contemporary ex-home of PPPs).

o Some examples of PPP bad press…

? To explain this paradox, there are 2 aspects that combine to offer at least a plausible

explanation:

o There are no empirical studies that show the long term value for money in PPPs

and non-PPPs (see NAO 2018 and other NAO reports)

? Currently, there are prospects of this from 2 sources:

? UK Dept of Education, but long term project (NAO 2018)

? Our Value Rating study in our grant! ?

o Until we have these studies and PPPs are shown to be inefficient in the long-term,

then this allows the short-term proponents i.e. politicians and treasury to reign…as

there are short-term financing benefits of using PPPs

? Where a government cannot or does not want to borrow the upfront costs

of financing traditional procurement

? Definitely applies to governments in developing economies (may

not be able to borrow upfront costs, or borrowing costs may be

higher than private sector).

? In contrast, governments in developing economies may not want to

borrow on balance sheet to avoid credit rating downgrade, for

example, in the…

o UK: we can refer to NAO 2018 that indicates that HM

Treasury only used PPPs because they are off balance sheet

and because treasury (central) can ignore/ neglect to

budget for future availability payments -> to departments

(now they can’t make PF2 off-balance because of change to

like AASB16, PPPs have dried-up in UK

o Australia, whilst PPPs currently also are off-balance sheet,

they are like treated at debt but as an operating lease with

the government’s view that operating lease not perceived

as badly by credit rating agencies (Martin Locke denies this

is the case!)…see paper Peter has found on this…

? Operating Lease and Credit Rating Abstract This paper

documents how firms’ concern about credit rating

downgrading and their attempts to get credit rating

upgrading affect their choice between the use of debt

and lease. Firms near a credit rating change tend to use

less debt relative to operating lease to finance their new

projects. This effect becomes more evident when firms’

rating concern becomes stronger. This effect is also more

significant when firms’ cost of equity finance is higher.

The finding is consistent with the empirical evidence that

the use of operating lease has much less impact on

firm’s credit rating compared to the use of debt. The

result is surprising because rating agencies are fully

aware of firms’ use of off-balance-sheet finance and

would adjust it when they assess firms’

creditworthiness. There are two possible reasons for the

result. First, the operating lease obligations are usually

underestimated. Second, auditors tolerate more

misstatement in disclosed off-balance-sheet items than

they do in recognized balance sheet items

(https://www.aeaweb.org/conference/2017/preliminar

y/paper/Ry77NHiQ)

? Unlike UK -> argues that Australia budget for future

payments -> however, -> CRR (e.g. ½ funded!) So

suspect like UK, Australia government seeking shortterm benefits from operating lease -> AND suspect

from AASB16 -> Any government will lost appetite

for PPPs like UK!!

? So until we see the results of long term studies such as our Value Rating study, then seems

reasonable to expect that PPPs will continue…in the context of the deteriorating fiscal

position of governments, making the short term benefits of PPPs more attractive! (maybe

a case of we not only get the politicians we deserve, but likewise we also get the

procurement model we deserve…though a bit too far to say this our paper because the

fact remains that we still don’t know, until we’ve done our Value Rating study, that PPP

are worse Value for Money than non-PPP, and even if our study indicates this, we have

only looked at one sector (when the theory of PPPs are that some projects/sectors suit

PPP better than others; and the PPP contracts are first generation contracts that lack

flexibility…this is lead into next point).

? So given PPP are likely to continue to prevail and to all PPP to reach their potential

(predicted by property rights theory to deliver better VfM than non-PPPs), then we can

seek to fix observations of market failure in PPPs

? One of the key market failures in PPPs seems to be costly variations…give some facts and

figures on this.

? Explain that this is hold-up, and that hold-up is the act of one party in a contract

appropriating quasi-rents, or switching-costs, from its counter party.

? Although hold-up can go both ways i.e. buyer can hold-up supplier or supplier hold-up

buyer, in our case we are concerned with supplier (PPP company) holding up buyer

(government).

? It would be good at this point if we can show that PPP company holding up buyer is

substantially only issue in availability PPPs whereas government holding up PPP company

more likely in user pays PPPs. (?)

? Explain that hold-up is fundamentally about negative opportunistic behaviour in the

deployment of an imbalance of power in a contract i.e. where a party becomes dependent

on the counter party, the counter party becomes more powerful...the more dependence;

the more power imbalance; and the more potential for hold-up (Emerson, 1962).

? In availability PPPs, it’s logical to expect government becoming most dependent on the

PPP company duration to the construction of one or more schools and in the case in which

government finds itself in urgent need of significant modifying the contract terms i.e. the

key parameters of the contract including the timing; scale and scope of works (as opposed

to the modifying the works within these parameters). The PPP company is not obliged to

agree to changing the terms of the contract…whilst changing the terms of the contract

can be done in any contract…the parties to the contract have to agree to this.

? In the in the case in which government finds itself in urgent need of significantly modifying

the contract terms in availability type PPP (A-T PPPs), then this dependence on the PPP

company is further increased when the government faces stretched resources (as all

governments in Australia seem to exhibit!) and greater costs of attempting to procure the

change using a different contract, i.e. the greater the switching cost and potential for holdup.

? Briefly introduce TCE as the dominant theory on hold-up and, therefore likely to be at

least part of the answer to helping government pre-empt hold-up, in terms of increasing

flexibility in the PPP contract to allow government the ability to more efficiently resolve

the case in which government finds itself in urgent need of significantly modifying the

contract terms in A-T PPPs.

? However, explain weakness of TCE in this case because it relies on endogenous

uncertainty, when the kind of uncertainty that leads to government needing to urgently

change the terms of the contract are exogenous.

? Briefly explain the complementarity of TCE and ROT (e.g. Roemer’s work).

? Therefore, surprising that integration of TCE and ROT has not been applied to the issue of

hold-up in availability PPPs.

? To rectify this, the purpose of this paper is to present an empirical test of a novel

integrated theoretical framework of TCE and ROT designed to explain how ROT can be

Exogenou

s

External Shock/

Exogenous Shock

(exposure outside

system)

Syste

m

Negative

hold-up

effects

Moderate

vulnerability

Endogenou

s

Internal Shock/

Endogenous Shock

(exposure inside

system)

Syste

m

Negative

hold-up

effectsModerate

vulnerability

used to increase the flexibility of A-T PPP contracts to mitigate hold-up by PPP companies

in A-T PPP contracts.

? We begin by reviewing the literature on the relationship between TCE and ROT on the

issue of hold-up and developing this relationship into a new integrative theoretical

framework of TCE and ROT, and corresponding hypothesis. Next, the design of the

empirical study to test the framework’s hypothesis is given. Results follow, along with a

discussion of their theoretical and practical implications. Finally, we conclude by reflecting

on the overall likely impact of this study’s implications, the limitations of the study and

suggestions for future research.