“Investigating the causal relationships and effects of moral hazard and adverse selection on public-private-partnership construction projects”

Globally, failures of Public-Private-Partnership (PPP) contracts are more often than not ascribed to moral hazard and adverse selection problems, which arise under conditions of inadequate and asymmetric information when an agent is hired by a principal. Currently in Ghana, there is no law on PPP but rather a draft bill. This fact makes the tendency of moral hazard and adverse very high in PPP construction projects. The aim of this research was to investigate the causal relationship and effects of moral hazard and adverse selection on Public-Private-Partnership projects. Literature review was carried out and it explored the motivating factors for entering into Public-Private-Partnership construction projects; causes of moral hazard and adverse selection of PPP construction projects; effects of moral hazard and adverse selection on PPP construction projects and the causal relationships of moral hazard and adverse selection of PPP construction projects. Questionnaires were used to collect data from respondents in the Accra and Kumasi metropolis. Two hundred and ten (210) questionnaires were retrieved out of two hundred and eighty (280) distributed representing a response rate of seventy five percent. SPSS, STATA and AMOS softwares aided in the analysis of data. Analytical tools used were descriptive statistics, mean score ranking, ANOVA, one sample t-test and Structural Equation Modeling (SEM). Reduction of public expenditures, faster delivery time of construction projects, achieving improved value for money (VFM), use of innovative materials and technologies and increased certainty of projects were the most significant motivations for the public sector entering into PPP construction projects. Furthermore, increase in accessible capital, gaining of profits, creation of goodwill for private partner, improvement in private sector’s international image and sharing of risks were the most significant motivations for the private sector entering into PPP construction projects. One way ANOVA was used to test the significance of perception among respondents in ranking these motivating factors for the public and private sectors. Effort dimensions which are not verifiable, low transfer of risk, lack of accurate information about project conditions, wrong party chosen to execute project and renegotiation of contracts were the most important causes of moral hazard and adverse selection problems in PPP construction projects. In addition, reduction of competition, high transaction costs, consequences on profitability of project, siphoning of funds and negative implications on enforceability of contract were the most important effects of moral hazard and adverse selection problems in PPP construction projects. One sample t-test was conducted on the causes and effects to establish the relative significance of these variables. SEM was used to explore the causal relationships between the causes and effects with causes being the independent variables (IV) and effects the dependent variables (DV). A model culminated out of these relationships. The findings of this research will serve as a guide to construction stakeholders helping them minimize the problems of adverse selection and moral hazard. This will ultimately lead to obtaining value-for-money projects and consequent immense satisfaction from the entire project. Despite the significance of these findings, there exist inevitable shortcomings and limitations in this study. These limitations are anticipated to be the basis for recommendations for prospective research studies. It is recommended that there should be increased incentives to control costs and construction risks should be managed.

Source: KNUST