Why contracts fail: a game theoretic approach to managing urban water

In developing countries, urban water is often provided by public private partnership (PPP). However, PPPs remain highly contentious, with many contracts renegotiated or stalled. Prima facie, this stems from issues in the French model of contract design between two parties – the government and the private operator. Critics point out that in reality, the PPP is a tri-party exchange of promises, services and fees linking the interests of the private operator, the government and the people. We propose a game theoretic analysis comparing a two-party contracting model with a tri-party one, which is tested against a real-world experiment in the water utilities in Manila and Jakarta. Paradoxically, we ?nd that a tri-party contracting model, though analytically more faithful in separating the interest of the government from the consumers’ leads to sub-optimal outcomes. In practical terms, we ?nd that an independent regulator may not generate better outcomes.