Pareto optimization of public-private partnership toll road contracts with government guarantees

Government Subsidies in Public-Private Partnership Projects Based on Altruistic Theory

“…Subsidies provided by governments in PPP projects amounts to a risk sharing mechanism for project returns to some degree (Wibowo et al, 2012). Instead, the governments share the revenue risk by providing guarantees, including concession guarantees (Carbonara, Costantino, & Pellegrino, 2014a;Galera & Soliño, 2010), services or products purchasing guarantees (Zhang, Chan, Feng, Duan, & Ke, 2016), restrictive competition guarantees (Liu, Yu, & Cheah, 2014), price adjustment guarantees (Carvalho & Nechio, 2011), minimum demand guarantees (Feng et al, 2015;Song et al, 2018;Wang et al, 2019), price compensation guarantees (Liu, Gao, & Cheah, 2017;Xiong, Zhang, & Chen, 2015), and minimum revenue guarantees (MRG) (Buyukyoran & Gundes, 2018;Carbonara & Pellegrino, 2018;Carbonara, Costantino, & Pellegrino, 2014b). However, too much risk-taking will eventually lead to government debt beyond payment capacity, thereby causing frequent local government defaults and even thorough failures of PPP projects.…”

“…However, too much risk-taking will eventually lead to government debt beyond payment capacity, thereby causing frequent local government defaults and even thorough failures of PPP projects. In those failure cases of PPP projects in the worldwide, the governments have provided guarantees for investors' minimum profits (Song et al, 2018;Wang et al, 2018Wang et al, , 2019. Contrary to intuition, excessive government guarantees will lead to unreasonable risk sharing, increasing project risks instead (Xu et al, 2014).…”

“…Nevertheless, few studies have paid attention to the analysis of altruistic theory in such PPP projects. Through PPP contracts, private investors are authorized to finance, build, operate and maintain the projects, and bear the duty for providing public services or products; whereas governments subsidize those projects by sharing the risks with investors to reap reasonable profits (Almassi et al, 2012;Song et al, 2018;Wang et al, 2019). Such trading behaviour between governments and private investors can also be explained by altruism theory.…”

“…Public-private partnership (PPP) arrangements have gained worldwide popularity in the provision of public services and products, such as plants, highways and tunnels (Song, Zhao, Jin, & Sun, 2018). Generally authorized by the governments, private investors recover their investment mainly through user payment (for instance, toll revenue) during the operation stage of these PPP projects (Feng, Zhang, & Gao, 2015).…”

“…Since PPP projects usually present strong public welfare and poor profitability, investors may not acquire reasonable profits only through the operation revenue, which even cannot cover the operation cost. In this scenario, governments should provide some substantial economic subsidies as specified in the concession agreement agreed upon by both parties to ensure PPP projects commercially viable (Song et al, 2018;Soumaré, 2016;Sun & Zhang, 2014;Wang, Cui, & Liu, 2018;Xu, Yeung, & Jiang, 2014). By the end of June 2019, there are 8414 projects with government subsidies in China alone, accounting for 93.1% (Ministry of Finance of the People's Republic of China, 2019).…”