Empirical Analysis of VFM and Contract Structures in PFI Projects:an Analysis of PFI Projects in Japan

Masato Yodo, Hirokazu Mizobata and Yusuke Hayashida

Economic Analysis, 2017, vol. 192, 47-66

Abstract: The purpose of this study is to investigate whether the Value for Money (VFM) of PFI projects depends on the fields and the contractual structures of the projects from the perspective of the incomplete contract theory. Recent research on incomplete contracts indicates that project fields and property rights of the facilities influence contractor incentives. Using data from 312 projects implemented in Japan by the end of March 2014, we show that the private contractors of these projects could attain higher VFM in water filtration and sewage business by adopting a BOT (Build-Operate-Transfer) contract. In contrast, in public facility construction and management projects, the contractors could achieve better results in VFM under a BTO (Build-Transfer-Operate) contract. In addition, we simulate the total VFM choosing desirable contractual structures for each project and find that the simulated VFM is approximately 40 billion yen higher than that in the actual contract. These results imply that the contractual structures play an important role in PFI projects. Specifically, to obtain higher benefits for the PFI, the type of contractual structures (BOT or BTO) requires careful selection depending on the field of each project. JEL Classification Number: D86, H54, H57 Key Words: PFI, VFM, Incomplete Contract Theory, BTO, BOT

Date: 2017
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