In many local, state, and national governments, the same public works agency is in charge of planning the infrastructure, designing and awarding the PPP contract, monitoring compliance, and renegotiating contracts. (Although there may be higher-level supervision, it is generally limited in its reach.) We believe this represents bad governance.
First, public works agencies tend to be biased in favor of building. This means that project selection is inefficient and that building projects rather than providing efficient infrastructure services is the goal of the agency. Even when this is not the case, an inherent conflict of interest exists between promoting infrastructure projects and monitoring compliance with contractual conditions.
We believe that the governance of the agency in charge of PPPs should be designed to separate contract design and award from contract monitoring; it should also subject renegotiations to independent review.
Our recommendation is that different functions should be kept separate. First, there should be an independent planning agency that designs, evaluates (through cost-benefit analysis), and selects projects, with the possibility of accepting public input and suggestions. An independent comptroller should review a sample of the projects approved by the planning agency to ensure that the agency has done its homework, and should publish its findings. The PPP's authority should award the project in a competitive process and supervise the contract.
After the award of the project, the comptroller or another independent supervisory agency should ensure that both the PPP's authority and the private party have complied with the contract. It should also monitor performance standards and service quality, and provide information to users and the public. A well-defined conflict-resolution mechanism should exist, ensuring that contract renegotiations do not change the profitability of the project for the private party. This would prevent regulatory takings and opportunistic behavior by the private party.
Finally, it is a bad idea to require legislative approval of PPP projects after the private concessionaire has been selected because this may lead to choosing firms with good lobbying abilities rather than firms that are the most efficient. Any legislative approval should take place before the project is put up for tender.