Abstract
This study aims to investigate the incentive mechanism of different availability payment methods applied in Public Private Partnership (PPP) contracts. We present a basic model in a multitask environment in which a risk-averse private contractor chooses two types of noncontractible efforts: one is unproductive, in the sense that it saves building cost but sacrifices social benefits; the other one is productive, as it reduces operating cost without social loss. We find that the PPP contract using separate charges for availability and performance is more desirable than using single unitary charge if the government can detect the social loss cause by unproductive effort. However, the latter brings about more social welfare over the former if the social loss is not observable to the government and the observable value of benefit-cost ratio of the unproductive effort is relatively larger than the benefit-cost ratio of the productive effort.
Highlights
In recent years, instead of traditional project delivery systems in which the government retained the responsibility for financing, design, construction, and operations, Public Private Partnerships (PPPs) have been widely used as a strategy to procure infrastructure services through private initiative
The theoretical contributions of this paper are tripartite: first, focusing on productive and unproductive efforts exerted by the private contractor, we investigated the effects of different availability payment methods to an extent to which the bundling effect is achieved; second, we investigated the role of risk sharing in restraining the unproductive effort; third, we incorporated the possibility of inability of the government to observe the quality of some services and investigated the effectiveness of PPP incentive contracts using different availability payment methods
Notwithstanding the policy relevance, little theoretical work has been carried on the topic of the payment mechanism of PPPs so far
Summary
Instead of traditional project delivery systems in which the government retained the responsibility for financing, design, construction, and operations, Public Private Partnerships (PPPs) have been widely used as a strategy to procure infrastructure services through private initiative. Compared to traditional project delivery systems, a relationship between both governments and private sectors can be of more mutual benefit in PPPs [1], [2]. The different funding mechanisms came with different payment mechanisms that define how the private contractor would be compensated and risk allocation strategy for the PPP projects. Since private contractors are responsible for both building and operation of the project, the pricing of the payment mechanism is more comprehensive than in traditional systems.
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