Opportunism and hold-up in the incomplete public private partnership (PPP) contracts

Opportunism is a concern for contracts that are incomplete in the presence of bounded rationality and uncertainty. Since Public Private Partnership (PPP) contracts are incomplete, are these contracts prone to opportunism? This paper attempts to find the answer to this question. It examines the contract design of the Indian PPP road contracts and analyzes its strengths and weaknesses to avoid the opportunism or hold-up using the probabilistic framework. This framework suggests that each type of contract should have its own self-enforcing range to make it incentive compatible. This paper compares the risk allocated in the two types of contracts (i.e. linked and delinked contracts) for delivering the project on time. Further, it empirically tests these findings using 82 PPP projects. The low probability of timely completion and longer time overruns in the delinked projects indicate the presence of possible opportunism. A further analysis of delinked contracts shows that the same set of companies (which have both types of contracts in their portfolio) could exploit the incorrectly specified delinked contract to create a hold-up like situation. In consonance with the contract theory, the analysis suggests that extra leverage should be given with more accountability and better checks.