Association for Public Policy Analysis & Management

Public-private partnerships (PPPs) have been widely used as the alternative governance for delivering transportation infrastructure projects in the U.S. besides the traditional public provision and the in-house provision. In Oregon, the enabling statutes for the partnerships have encouraged the use of design-build (DB) method besides the traditional design-bid-build (DBB) method. With the DB method, the design and construction works are bundled in one contract with a private firm, allowing the private firm to enter at the early stages of the project, after a minimum design prepared by the public agency. While with the DBB method, design and construction are awarded separately and sequentially to private firms, where private contractors are invited to bid for a construction project under a specified design prepared in-house by the public agency or contracted-out to private designers. Although PPP enabling statutes have been enacted since 2003, the use of DB method is still very limited, suggesting that there is a gap between the trend toward the use of PPPs and the experience of the public sector in applying PPPs that can be related to the lack of experience or the caution of the public agencies regarding. Meanwhile, empirical research regarding the performance of DB versus DBB projects is still very limited while the results are not consistent.

This paper aims at empirically evaluating the extent that the DB method would be able to produce more efficient results compared to the traditional DBB method. I use transaction cost economics approach to reveal how transaction costs have influenced the choice of the delivery methods and thus its economic performance. Using a two-stage empirical strategy, I examine 59 bridge and a combination bridge-roadway projects in Oregon. At the first stage, the input-saving efficiency index is measured by using the non-parametric data envelopment analysis (DEA) technique, using costs and time duration for the input variables, and lane miles and square-foot bridge deck for the output variables. At the second stage, the efficiency index is analyzed using the instrumental variable two-stage regression approach to estimate the effect of transaction costs on the efficiency of DB versus DBB projects, taking into account the endogenous project selection problem. The transaction costs are proxied by three instrumental variables: the number of project sites (indicating the complexity of the project), the number of bidders (indicating the level of asset specificity), and the absence of county government’s funding (indicating the size of the investment). I find that DB projects are more efficient than the DBB projects, and that transaction costs help predict the choice of DB mode, i.e. the probability of using DB mode over DBB mode, and thus, the differences in efficiency between DB and DBB projects. These findings are consistent with the transaction cost economics theory that suggests transaction costs minimization motive underlies the choice of governance structure, in this case, the DB method. This paper contributes to the large literature about method for performance evaluation, suggesting a proper way of conducting an empirical comparative study of PPPs, considering the selection problem.