Regulatory Quality, Transaction Costs, and the Performance of Kenyan Public-Private Partnerships

Abstract

Anchored in Transaction Cost Economics, this study examined the moderating effect of regulatory quality on the relationship between transaction costs and the performance of Public-Private Partnerships (PPPs) in Kenya. Adopting a positivist research philosophy and an explanatory, cross-sectional survey design, the study operationalised transaction costs as a composite measure combining asset specificity, uncertainty, frequency of transactions, and governance structures, and regulatory quality through legal framework strength, transparency and accountability, and enforcement efficiency. Primary data were collected using structured, five-point Likert-scale questionnaires from respondents engaged in PPP implementation across six sectors in Kenya; individual-level responses were aggregated to a final analytic sample of 67 PPP projects (215 respondents, 82.7% response rate). Data was analysed using descriptive statistics, Pearson correlation, and hierarchical moderated regression. Results showed that transaction costs and regulatory quality jointly explained 59.2% of the variance in PPP performance, rising to 67.1% once the interaction term between transaction costs and regulatory quality was introduced, which was positive and statistically significant (β = 0.607, p < 0.001). The null hypothesis (H₀: regulatory quality has no statistically significant moderating effect on the relationship between transaction costs and PPP performance) was rejected, indicating that regulatory quality significantly moderates the transaction cost–performance relationship: transaction costs translate into stronger performance gains where regulatory quality is high, rather than functioning as an unconditional source of inefficiency. Kenya's PPP Directorate and sector regulators are encouraged to strengthen legal frameworks, transparency, and enforcement efficiency so that transaction-related activities function as productive coordination mechanisms rather than sources of delay in PPP delivery.