Contractual Efficiency of PPP Infrastructure Projects: An Incomplete Contract Model

Lei Shi, Lu Zhang, Masamitsu Onishi, Kiyoshi Kobayashi and Dashuang Dai

Mathematical Problems in Engineering, 2018, vol. 2018, 1-13

Abstract:

This study analyses the contractual efficiency of public-private partnership (PPP) infrastructure projects, with a focus on two financial aspects: the nonrecourse principal and incompleteness of debt contracts. The nonrecourse principal releases the sponsoring companies from the debt contract when the special purpose vehicle (SPV) established by the sponsoring companies falls into default. Consequently, all obligations under the debt contract are limited to the liability of the SPV following its default. Because the debt contract is incomplete, a renegotiation of an additional loan between the bank and the SPV might occur to enable project continuation or liquidation, which in turn influences the SPV’s ex ante strategies (moral hazard). Considering these two financial features of PPP infrastructure projects, this study develops an incomplete contract model to investigate how the renegotiation triggers ex ante moral hazard and ex post inefficient liquidation. We derive equilibrium strategies under service fees endogenously determined via bidding and examine the effect of equilibrium strategies on contractual efficiency. Finally, we propose an optimal combination of a performance guarantee, the government’s termination right, and a service fee to improve the contractual efficiency of PPP infrastructure projects.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnlmpe:3631270

DOI: 10.1155/2018/3631270

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