Analysis and Review of Key Factors at PPP Project Renegotiation

Abstract

Abstract. The public-private partnership(PPP) projects, on one hand are critical in delivering public service, on the other hand have the characteristics propitious to recurrent renegotiation, which renders the extension of construction and concession, and increase of operation cost as well as the governmental responsibility and thus reducing the effectiveness and wasting the public resources. The author aims at review and analysis the risk upon renegotiation and propose several risk aversion strategies by exploring the key influencing factors of renegotiation based on several typical PPP renegotiation cases.

Dynamic performance incentive model with supervision mechanism for PPP projects

“…The proposed dynamic incentive model is able to reflect the quantitative relationships or interactions among the operation performance of the PPP project and the benefits of the stakeholders, the private sector's effort level, the incentive parameter, the maintenance cost and other relevant factors (Iossa and Martimort, 2015; Liu et al , 2016). The economic, social and hybrid benefits of the public sector can be improved while protecting the private sector's economic benefit by adjusting the incentive parameter to control the private sector's effort level unknown to the public sector (Wu and Yang, 2016). Through adjustment of the reward–punishment coefficient based on the supervision results such as operation performance and maintenance cost (Currie and Teague, 2015), renegotiation of the PPP contract that may impair the benefit of the public sector can be avoided (Domingues and Zlatkovic, 2015).…”

“…Microeconomics studies economic tendencies or what is likely to happen when individuals make certain choices or when the factors of production change (Iossa and Martimort, 2015). The principal–agent theory aims to study a contract when there is information asymmetry, where the agent may take hidden actions unknown to the principal and agency relationships often preclude complete monitoring so that the principal cannot observe the actions of the agent (Wu and Yang, 2016). The microeconomic and principal–agent theories were applied to explore the incentive problem within an organization (Tirole, 1994; and Holmstrom, 1999), which have been the bases to study the incentive model for the PPP contract where the public sector acts as the principal and the private sector acts as the agent (Keating and Keating, 2013; Iossa and Martimort, 2015; Liu et al , 2016; Prat and Jovanovic, 2014).…”

“…To consider uncertainties during the long-time period and protect the benefits of the stakeholders of the PPP project, it is necessary to adjust the incentive parameters based on supervision so as to avoid losses when activating the contract renegotiation. By applying the microeconomic and principal–agent theories (Iossa and Martimort, 2015; Wu and Yang, 2016), the dynamic performance incentive model for the PPP project is explored according to the following procedure:Make some assumptionsAssumption about performance function of the PPP project;Assumption about social and economic benefits of the PPP project;Assumption about basic performance incentive model;Assumption about operation cost of the private sector project.Establish static performance incentive modelBenefit of the private sector: Establish the model calculating the economic benefit of the private sector, thus determining the optimal effort level of the private sector.Benefit of the public sector: Establish the model calculating the social, economic and hybrid benefits of the public sector, and determine the optimal reward–punishment coefficient.Establish dynamic performance incentive modelBenefit of the private sector: Establish the model for calculating the economic benefit of the private sector when considering reward–punishment coefficient adjustment, and suggest propositions regarding the adjustment range.Benefit of the public sector: Establish the model for calculating the economic and hybrid benefits of the public sector when considering reward–punishment coefficient adjustment, and suggest propositions regarding the adjustment ranges.…”

“…In order to propose the dynamic performance incentive model for the PPP project from the perspective of the public sector, some assumptions are made based on microeconomics (Iossa and Martimort, 2015) and the principal–agent theory (Wu and Yang, 2016) as well as relevant studies (Tirole, 1994; Holmstrom, 1999; Keating and Keating, 2013; Liu et al , 2016; Prat and Jovanovic, 2014).…”

“…Microeconomics has been applied to analyze the economic tendencies through quantitative relationships among relevant factors influencing the performance of a PPP project (Iossa and Martimort, 2015). The principal–agent theory is utilized in integration with microeconomics to study the contract and the associated incentive mechanism under an asymmetric information circumstance (Tirole, 1994; Holmstrom, 1999), including the PPP contract where the public sector acts as the principal and the private sector acts as the agent (Wu and Yang, 2016). For instances, Cao et al (2015) analyzed the incentive model and the impacts of supervision/punishment strength on the performance of the PPP project.…”