Public Private Partnerships: Designing For Flexibility

Public-­‐Private Partnerships (PPPs) are potentially important contributors to the effort to deliver the infrastructure and services required for India’s sustained, inclusive growth. They are also, however, complex organizational arrangements for collaboration in the face of new information, changing circumstances, and potential differences in partners’ objectives. Institutional design for the next generation of PPPs will be challenging. This paper focuses on one important dimension for design: increasing projects’ flexibility, or their ability to cope with and extract value from new information and changing circumstances. We lay out a spectrum of “flexibilities,” ranging from clauses that allow transactional terms to adjust to observable changes in circumstances, to real options embedded in technology and/or contracts, to bounded renegotiation. Each of these approaches has been used in practice and we briefly describe their application in India and elsewhere. The final sections discuss some of the challenges of implementing flexibility in PPPs in India, including the need to build public legitimacy for ex-­‐post changes in contracts as well as build capacity to anticipate and map project risks ex-­‐ante. It will not be easy to build these aspects of the institutional environment for PPPs, but both trust and foresight are important for broader good governance.