Termination Fees and Contract Design in Public-Private Partnerships

Abstract

We study the effects of granting an exit option that enables the private party to early terminate a PPP project if it turns out to be loss-making. In a continuous time setting with hidden information about stochastic operating profits, we show that a revenue-maximizing government can optimally trade-off direct subsidies for capital investment against the right of opting out the PPP. In particular, the exit option, acting as a risk-sharing device, can soften agency problems and increase the value-for-money of public spending, even while taking into account the budgetary resources needed to resume the project in the event of early termination by the contractor.

Fiscal Pressure and Public–Private Partnership Investment: Based on Evidence from Prefecture-Level Cities in China

“…This paper examines the impact of fiscal pressure on PPP investments using the data from local governments in China from 2000 to 2015. Table 4 shows that fiscal pressure has an impact on PPP investment at the local level, based on the regression seen for the sample of 291 prefecture-level cities in China, which confirms previous studies by Hammami et al (2006) [1], Albalate et al (2015) [19], and Buso et al (2017) [36]. In other words, fiscal pressure on local governments can be alleviated through the adoption of PPP investment.…”

“…All variables in our paper are clearly defined in Table 1. [4,[34][35][36] considering the availability of data, we selected the data on PPP projects of prefecture-level cities (lnPPP) in China from 2014 to 2019 using whole-group sampling, and the data are from the Center for Government, Social Capital Cooperation of the Ministry of Finance, and the WIND database (the WIND database is a provider of financial data and analytical tools, and Information is a mainland China financial data, information and software services company headquartered in Shanghai's Lujiazui Financial Center. https://www.wind.com.cn/portal/en/Home/index.html, accessed on 23 January 2021).…”

Optimal Early Termination in PPP Projects Based on Real Options Theory

“…In fact, the rot has found several applications in the infrastructure sector to value contractual guarantees (Ho & Liu, 2002;Bowe & Lee, 2004;Garvin & Cheah, 2004;Brandão & Saraiva, 2008;Ashuri et al, 2012;Liu et al, 2014;Carbonara & Pellegrino, 2018), as well as to analyse optimal price schemes (Feng et al, 2015). However, these are not the only compensation mechanisms, it is also usual to find compensation mechanisms for early termination (Caselli et al, 2009;Cabero et al, 2017;Liu et al, 2017;Igrejas et al, 2017;Song et al, 2018;Buso et al, 2019;Giraldo, 2019;Xiong & Han, 2021).…”

“…Furthermore, Buso et al (2019) examined the effects of granting an exit option that enables the private party to terminate a ppp project early. They developed a model under a real options framework where the contractor holds private information on operating profits.…”