Responsive Regulation in Public-Private Partnerships: Between Deterrence and Persuasion

Design-Build-Finance-Maintain-Operate (DBFMO) contracts are a particular type of public-private partnership whereby governments transfer the responsibility for the design, construction, financing, maintenance, and operation of a public infrastructure or utility service building to a multi-headed private consortium through a long-term performance contract. These arrangements present a typical principal-agent problem because they incorporate a “carrot and stick” approach in which the agent (consortium) has to fulfill the expectations of the principal (procurer). This article deals with a neglected aspect in the literature related to the actual use of “the sticks or sanctions” in DBFMOs and assesses to what extent and under which conditions contract managers adopt a deterrence-based enforcement approach or switch to a persuasion-based approach, specifically when the contract clauses require the use of (automatic) deterrence. An empirical analysis of four DBFMOs in the Netherlands shows that the continuation of service delivery, the need to build trust, and the lack of agreement on output specifications play a role in the willingness of the procurer to apply a more responsive behavior that uses persuasion, even when deterrence should be automatically applied.