A study on foreign investment and development of water business in China: Based on agency approach

Abstract

China faces severe water shortage and pollution problems, which are affecting China's sustainable economic growth and social development. China's water market reforms have created many opportunities for foreign companies. Most foreign companies' access into China's water market is in the form of BOT, TOT, and joint ventures. Especially the BOT is main contract style for PPP of this business between foreign infrastructure investors and the local government. But there is a possibility of conflict between moral hazard of foreign private companies and the monitoring by the government due to incentive for investors. Here by a game theory approach, we analyzed following questions: what is the reasonable win-win relationship between foreign companies and the Chinese government in this type of projects? From an agency or game theoretical approach, we modeled the relationship between potential moral-hazard behavior of the private company and the monitoring cost and social utility for the government. Finally we wish to propose the Pare optimum solution as less moral hazard and lower monitoring cost contact type.