Effect of public–private partnership features on contractual complexity: evidence from China

Abstract

PurposeA public–private partnership (PPP) is an agreement between the government and private investors to deliver long-term public services. The efficiency of PPP projects depends on PPP contracts stipulating contractual parties' corresponding responsibilities and rights to deal with relational and performance risks. Although more complex contracts provide more remedies for mitigating ex-post transaction costs, they also result in the increased ex ante transaction costs associated with contract writing. Thus, contractual complexity is a design choice that can reduce the overall contract transaction costs.Design/methodology/approachUsing 365 transportation PPP projects in China from 2010 to 2019, this study applies the Poisson regression model to examine the effects of payment mechanisms, ownership by investors and equity structure on contractual complexity.FindingsPPP contracts have control and coordination functions with unique determinants. Parties in the government-pay mechanism are more likely to negotiate coordination provisions, which results in greater contractual complexity. PPP projects with state-owned enterprises (SOEs) have less contractual complexity in terms of both two functions of provisions, whereas the equity structure has no impact on contractual complexity.Originality/valueThese findings provide a nuanced understanding of how various contractual provisions are combined to perform control or coordination functions and make managerial recommendations to parties involved in PPP projects.