Transaction Costs for Life-Cycle Contracts in Public Procurements

This study investigates how transaction costs affect the efficiency of life-cycle contracts in public-private partnership (PPP) arrangements. These contracts imply that the government finds a long-term partner (from the private sector) whose task is to carry out the whole cycle of works from the design of the asset to its day-to-day operation. Life-cycle contracts have a number of benefits that make them especially attractive: high quality of final asset, risk-sharing, cost savings. However, they are associated with high transaction costs by academics and practitioners alike. In this paper, a sample of 53 UK LCC projects is constructed using publicly available data. Based on existing literature, the exact determinants of transaction costs are specified, such as project country, sector, size and operational period. They are then inserted into a regression model in order to assess whether the difference in transaction costs is statistically significant across each determinant. The determinants of project sector, its size and operational period actually proved to significantly influence the size of transaction costs. Some interesting results emerge: transaction costs tend to be lower in bigger projects; educational sector has higher transaction costs due to longer bidding and tendering procedures. The determinant of operational period has a negative correlation with transaction costs in LCCs: when the operational period increases, transaction costs decrease. After the regression analysis, measures that may ease the burden of transaction costs in LCCs are suggested, such as using in-house resources instead of external advisors, applying open tendering procedure instead of negotiated procedure, establishing minimum project size. These measures can actually decrease transaction costs in LCCs, thus increasing the efficiency of this type of contract.