Flexible contracts to cope with uncertainty in public–private partnerships

Public private partnerships (PPP) are long lasting contracts, generally involving large sunk investments, and developed in contexts of great uncertainty. If uncertainty is taken as an assumption, rather as a threat, it could be used as an opportunity. This requires managerial flexibility. The paper addresses the concept of contract flexibility as well as the several possibilities for its incorporation into PPP development. Based upon existing classifications, the authors propose a double entry matrix as a new model for contract flexibility. A case study has been selected – a hospital – to assess and evaluate the benefits of developing a flexible contract, building a model based on the real options theory. The evidence supports the initial thesis that allowing the concessionaire to adapt, under certain boundaries, the infrastructure and services to changing conditions when new information is known, does increase the value of the project. Some policy implications are drawn.

► Flexibility can increase the value for money of concession contracts.
► Bundling infrastructure and clinical management can increase the projects' NPV.
► Contractual flexibility allows to tackle the uncertainty behind long term contracts.