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This study aims to investigate the incentive mechanism of different availability payment methods applied in Public Private Partnership (PPP) contracts. We present a basic model in a multitask environment in which a risk-averse private contractor chooses two types of noncontractible efforts: one is unproductive, in the sense that it saves building cost but sacrifices social benefits; the other one is productive, as it reduces operating cost without social loss. We find that the PPP contract using separate charges for availability and performance is more desirable than using single unitary charge if the government can detect the social loss cause by unproductive effort. However, the latter brings about more social welfare over the former if the social loss is not observable to the government and the observable value of benefit-cost ratio of the unproductive effort is relatively larger than the benefit-cost ratio of the productive effort.

Sustainable operation of public-private partnership (PPP) infrastructure projects that are characterized by considerable external benefits is of vital importance. However, a liquidity shock might trigger an inefficient liquidation of a project by the special purpose vehicle (SPV) and the bank, whose objectives are to maximize the profits generated by the project. This study argues that performance guarantee and subsidy policies implemented by the government play a role in encouraging socially efficient decisionmaking by the SPV and the bank to ensure the continuation of socially valuable projects. The results show that both government subsidy and performance guarantee policies are effective in avoiding the inefficient liquidation of PPP infrastructure projects when the external benefits are large and certain. However, a performance guarantee policy might lead to inefficient continuation when the external benefits of a project are uncertain. Finally, we discuss the possibility that an integrated policy combining performance guarantees and government subsidies improves the efficiency of a PPP infrastructure project.

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