Negotiating PPP/PFI projects

What is it about?

Public-private partnership (PPP) projects specify outputs rather than inputs. While changes are inevitable over long concession periods, output specifications should facilitate the negotiation of foreseeable changes. An experimental approach based on game theory was adopted to evaluate the effectiveness of different strategies for negotiating changes. A multi-stage bargaining process using the ‘z-Tree’ software was designed to simulate four change scenarios with three output specification versions encompassing different change management strategies in a computer laboratory. Under each change scenario, pairs of public and private participants negotiated on the sharing of additional costs incurred by changes in the life cycles of fictitious PPP projects based on the different versions of output specification. The time taken to reach settlement or negotiation breakdown was recorded together with the cost-sharing pattern, with feedback collected from the participants on the effectiveness of the specification strategies immediately after the experiment. It was found that a detailed and clear output specification incorporating a cost-sharing framework facilitates change negotiations. Although the first-mover advantage was recorded, the gaps were narrowed in the multi-stage bargains. A similar controlled experiment was conducted with university students for comparison. Findings should lead to improvements in output specifications for change negotiation of PPP projects.

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