When choosing the combination to be used, several factors must be taken into account. They comprise the technological, market, institutional, political and social aspects affecting each project in particular.
From the technological point of view, the more dynamic and changing the technology prevailing in one sector is, the more necessary it is to assure internal decision making mechanisms which allow for efficient contract adaptation, thus ensuring that the Value for Money associated to PPPs is maximized. This is particularly relevant in sectors such as IT and, within the infrastructure sectors, telecommunications, where the evolution of technology turns any technical solution obsolete in a few years93.
The degree of market competition is a second element to consider. Clearly, there is no need to regulate competitive markets; therefore, it is possible to rely on the internal governance mechanisms of the PPP contract. On the other hand, the more monopolistic elements there are on the market or within a sector, the more necessary it will be to have external control mechanisms ensuring end consumer protection against monopolistic abuse.
The institutional endowment of a sector or country is also an important factor in the selection of the mechanisms for supervision and control of the PPP stages. The creation of efficient independent regulatory entities largely entails the existence of dully qualified human and technical resources. Provided that said resources are scarce, contractual solutions are more feasible and efficient.
The country's legal tradition must also be properly taken into account while designing the PPP mechanisms and institutions94. In general, the Anglo-Saxon tradition, focused on the "common law," is more inclined to adopting contractual solutions. The Latin tradition, where the Government is mainly ruled by administrative law, in many cases restricts the implementation of purely contractual solutions to any conflicts between the public and private sectors.
The political scenario is another essential element when determining institutional solutions for PPP contracts. Solid consensus among political parties and public acceptance of the positive role that the private sector may play in infrastructure services are factors facilitating the adoption of contractual supervision and control mechanisms. On the other hand, the lack of said elements would lead to the need to adopt more rigid external mechanisms duly guaranteeing the parties' rights95. It should be noticed that said political elements may vary depending on the different sectors and jurisdictions, thus any related solutions would also vary.
The social aspects involved in the project are also to be taken into account. Partly, they will depend on the project and its connection with end consumers, particularly low-income residential consumers. In projects where the social aspects are not highly relevant- i.e., those where there is no direct relationship between the private vendor and residential consumers - it is easier to establish contract internal mechanisms. This is the case of power generation plants, water treatment plants and free highways. In turn, water distribution and sanitation or electricity services are socially sensitive and involve direct relationships with household consumers. This leads to a greater need of independent formal regulation.
The selection of a governance structure and PPP project regulation mechanisms is then determined by these factors. Given the nature of the infrastructure sectors and the experience on PPPs and its regulation over the last years, in general, the optimum combination should include both a contractual governance system and external regulation elements.
_____________________________________________________________
93 Reports in the UK have noted that PPP are not well suited for IT projects given the very fast path of technological change.
94 Any attempt to mechanically adopt institutional solutions to completely different contexts poses serious risks and has been the source of multiple failures in private regulation and participation in infrastructure. See Matching regulatory Design to country circumstances Ebhart A - Gridlines Note No 23 May 2007.
95 A total lack of these attributes would clearly result in the PPP unfeasibility, thus some minimum degree of political consensus is always required in these sectors.