The effect of procurement on competition and flexibility : determining the suitability of public-private partnerships in major infrastructure projects

"Government plays a pivotal role in addressing market failure, that is, to prevent inefficient allocation of resources in the market, resulting in an inequilibrium, such as lack of competition or monopoly. This is especially important in the provision of major infrastructure, and is evidenced by the fact that governments are constantly searching for ways to improve procurement processes that prevent market failure and enhance Value-for-Money (VfM). More specifically, governments have the ability to minimise the likelihood of market failure ex ante (or pre-contract) by leveraging the technological advantages of the market (such as proprietary or tacit knowledge and resources), and ex post (or post-contract) if the market firm (or private sector firm) holds-up government because of a change in the works. Nevertheless, delivering and demonstrating the efficacy of procurement in addressing market failure and ultimately VfM, has remained a challenge, not least because of difficulties involved in establishing reliable estimates of costs and benefits in whole-life terms, the intractability of data (particularly in the operational stage), and a lack of comparative empirical studies across all modes of procurement. Collectively, this lack of theory and data is evidenced by the fact that procurement selection remains very much a vexed question. In light of the above, indirect approaches to procurement selection have greater appeal. However, the most well-established indirect approach the Multi-Attribute Utility Approach (MAUA) suffers from its own range of weaknesses, which mostly arise from its lack of theoretical grounding and tautological stance. This research addresses these weaknesses, and develops a new decision-making model to determine the appropriate procurement approach PPP or other for the provision of major infrastructure projects. In the process of developing the model, the research harnesses the relative strengths of a number of Nobel Prize-winning theories from the New Institutional Economics (NIE) namely, Transaction cost theory and Transaction cost economics to explain the effect of procurement on Expressions of Interest (EoI) as a key indicator of competition and flexibility (the scope of contract and/or the ability of the contractual arrangement to deal with variations in the works) and, in turn, a critical proxy of market failure and VfM. That is, EoI is indicative of the attractiveness of a project to the market, with low EoI indicating pre-contract market failure in terms of oligopoly pricing constraints and high EoI indicating post-contract market failure in terms of potential negative opportunistic behaviour as a result of lack of flexibility. It then combines these theories with Resource-based theory (RBT) to delineate key dimensions of procurement (comprising of size of the project, the level of bundling, and the nature of exchange relationship). This research adopts the ontological perspective of realism and uses survey and case study methods. The statistical analysis of results from a survey of major road and health projects comprising of a representative sample of 87 projects (worth AUD 32 billion) across both Road and Health Sectors in Australia in the five year period from 2006-2010 confirm the reliability and validity of using EoI as the dependent variable and proxy for VfM. The analysis of four case studies of major road and health infrastructure projects and the analysis of a nationwide survey of civil and building contractors supports the hypothesis developed to test the model. This research, and its resultant procurement decision-making model, represents the first deployment of a combination of (selected) NIE theories and RBT to determine procurement mode in pursuance of VfM. As such, it is a potentially alternative procedural framework to MAUA-based procedures, such as Australia s National PPP Guidelines (Volume 1: Procurement Options Analysis), and other MAUA-based procedures around the world. In summary, the a priori model deploys a novel integration of dominant microeconomic theory in the specific context of social and economic infrastructure. The model is empirically tested using EoI as a valid and reliable indicator that the configuration of the key procurement dimensions (for either PPP or non-PPP mode) selected for the project is more likely to set the project on a path to superior VfM relative to competing modes."