Transaction Cost in Public-private-partnerships

Due to limited financial resources of governments, Public Private Partnerships (PPPs) have emerged as one of the most important ways of delivering infrastructure projects. Compared to traditional delivery approaches, PPPs bundle complex investments and service provisions with different project entities in a single long-term contract. Because of these special characteristics, many transactions happen during the life cycle of a PPP project, resulting in an increase in ―transaction cost‖ of the project. Transaction costs are known in economics as the costs associated with executing projects such as searching, negotiating, contracting and enforcing. Earlier studies show transaction costs in other industries are significant. This paper covers a theoretical discussion about the definition of transaction costs and different factors affecting them. It discusses the relationship between number of bidders, procurement time, complexity of the project, program maturity and size of the project with the transaction cost of the project. It develops a general PPP process flowchart for infrastructure projects in the US, and based on the mapping of PPP transaction activities to project costs, presents a cost breakdown structure (CBS) as well as a cost coding system. This accounting model is further justified with a case study about I-595 improvements project in Florida.