Assigning Tasks in Public Infrastructure Projects : Specialized Private Agents or Public Private Partnerships?

How should the different tasks in an infrastructure project be allocated to private and public agents, respectively? Traditionally, building the physical asset is assigned to private partners whereas financing and operation are carried out by the public sector. But even if building, operation, and possibly financing are delegated to the private sector, the question remains whether all these tasks should be accomplished by a single private agent in the form of a Public Private Partnership (PPP) or assigned to independent firms. To analyze this problem we apply an incomplete contracts approach and consider both informational asymmetries and investment incentives. The advantage of bundling tasks within a PPP is shown to depend crucially on how uncontractible investments in the building stage influence operating costs and service quality. The theoretically derived criteria are then applied to a specific PPP-project: The federal motorway A8 between Augsburg and Munich. Here we particularly discuss whether the chosen way of sharing financing tasks and demand risk within this PPP is likely to be appropriate