Transaction Cost Analysis of Public-Private Partnership: Concession Agreement in the Water Sector and Build-Lease-And-Transfer Agreement in Transportation Sector

The study is a transaction cost analysis of public-private-partnership (PPP) contracts, specifically of the Metropolitan Waterworks Sewerage System (MWSS) Concession Agreement and the Metro Rail Transit Corp. (Metro Rail) Build-Lease-and-Transfer (BLT) Agreement. The study found out that the two PPP contracts clearly specified the obligations and responsibilities of each party. Specifically, the study showed that the two agreements required a considerable regulatory oversight. In the Metro Rail BLT Agreement, almost all the risks are borne by the public sector whereas in the MWSS Concession Agreement, the private sector bears a significant share of the risks. The study presented and explained the transaction costs involved in each contract’s provisions. The results are consistent with Williamson’s analysis of transactions as well as with Rindfleisch and Heide’s (1997) analysis where the sources of transaction cost are the nature of governance problems. Results revealed that the two PPP contracts incur transaction costs, the intensity of which depends upon the compliance at each contract provision.Finally, this study suggests that governments should consider the high transaction costs in the provision of public infrastructures and services under the PPP scheme and develop sufficient contract management capacity to mitigate the risks of contracting.