Traditional road construction contracts have been in use for many decades despite a significant drawback: they are based on the amount of work executed, which can create the wrong incentive for some contractors to maximize profits by inflating the volume of work. Furthermore, construction contracts don’t take long-term maintenance into account, which can result in subpar road conditions and a lack of accountability. This approach can lead to inefficiencies, higher costs, and a misalignment of incentives between governments and contractors. The bottom line is road users end up paying more.
Fortunately, there is a better way: performance-based contracts, or PBCs. First introduced in Canada in the 1980s, PBCs use fixed, lump-sum payments that encourage contractors to minimize the volume of work and take preventative steps to maintain good road conditions and minimize operating costs for road users. Instead of emphasizing direct construction costs, PBCs define service levels and transfer much of the risk to contractors. Implementing PBCs requires good budget forecasting and greater flexibility from governments. But in the end, they are likely to lead to higher quality roads, and often do at a lower cost.
Over the past 30 years, PBCs have been implemented globally as a complement to traditional civil works contracting for roads. In the 1990s, the World Bank found that PBCs could be used in developing countries to address the issue of sustainability of road infrastructure investments. In these countries, road maintenance expenditures are often inadequate, leading to poor road conditions and costly road reconstruction. PBCs were seen as a way to address this issue by committing to funding road maintenance and promoting quality road maintenance.
The theory sounds good. But is there evidence clearly showing that PBCs are more cost-effective than traditional road construction contracts? Until recently, research focused on potential or perceived savings to road agencies.
A recent World Bank study funded by the Quality Infrastructure Investment (QII) Partnership looked into this question more deeply. A key aspect of quality infrastructure is economic efficiency throughout the life cycle of an infrastructure asset. The aim was to provide a solid analysis comparing the economic efficiency of PBCs and traditional contracting for road works.
The analysis included a representative sample of six case study countries with experience implementing road works through both PBCs and traditional road works contracts: Argentina, Botswana, Lao People’s Democratic Republic, Liberia, New Zealand, and the state of Florida in the United States. The road works compared in each case study were as similar as possible in terms of scope, socioeconomic environment, climate, topography, geology, traffic, and other factors. Data was collected concerning environmental and social externalities, road agency costs, road user costs, and factors affecting contract procurement and administration.
Simultaneously comparing the economic efficiency of PBCs and traditional contracting approaches across numerous countries proved very challenging due to gaps in available data, including historical data for contract expenditures, road conditions, and traffic for traditional contracts. The sample sizes were also too small to reach statistically relevant conclusions.
The study also revealed benefits relevant to road agencies. It found that PBCs can lead to better budget forecasting, consistency of outcomes, faster completion of emergency repairs, risk transfer to the private sector, lower long-term procurement costs, and ease of contract administration. They also encourage governments to weigh road infrastructure service levels against available funding resources and motivate contractors to manage risks and costs rather than pass these on to the government.
PBCs are not without drawbacks. They are more complex to implement, which can be challenging for public entities and private sector firms. Capacity is an issue, meaning that extensive training is necessary to bring practitioners and contractors up to speed. PBCs also require more flexibility from governments and IFIs and impose long-term budgetary obligations on governments.
The study’s findings show that PBCs help contractors and governments focus on the long-term efficiency of road investments and promote two of the principles of Quality Infrastructure Investment: improving economic efficiency in view of life cycle costs and strengthening infrastructure governance. Taking stock of global practices in collecting and managing road agency data will take time. But the effort is worthwhile: it will help stakeholders identify areas for improvement and coordination, which will benefit future road investment initiatives.
The views and opinions expressed in this blog/article do not necessarily reflect the views of the team managing the Community of Practice (COP) or the World Bank. Readers are encouraged to critically evaluate the contents and draw conclusions on their own.