The influence of quality benefit and marginal contribution on the optimal equity structure of the PPP projects: balancing public and private benefits

Bing Wang, Shuibo Zhang, Xiuqin Wang and Zhuo Feng

Construction Management and Economics, 2018, vol. 36, issue 11, 611-622

Abstract: Public–private partnerships (PPPs) involve many different participants, and the equity allocation between them may influence the performance of PPP projects. While the optimal capital structure and equity capital structure of the project company have been extensively investigated, few studies have examined how to allocate equity shares among different private participants. Considering both public and private benefits, this study focuses on the optimal equity structure between construction contractor (CC) and operating contractor (OC). A game model is used to analyze how quality benefit and marginal contribution of CC and OC’s effort affect the optimal equity structure. The findings reveal that the private consortium expects the party (CC or OC) with higher marginal contribution of effort to own more equity shares, while government expects the party (CC or OC) with lower marginal contribution of effort to own more equity shares. Furthermore, a non-linear relationship between the optimal equity structure and government’s bargaining power is found. The results also manifest that the quality benefit of construction on operation is a nontrivial factor when designing the equity structure. If unconsidered, the CC’s optimal equity ratio will be either undervalued (when a higher construction quality can reduce the operating cost) or overvalued (when a higher construction quality can increase the operating cost). These findings can provide some insights into designing the equity structure for PPP projects in the bidding process.

Date: 2018
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DOI: 10.1080/01446193.2018.1468079

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