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.
Highlights
Public-private partnerships (PPPs) are innovative arrangements enabling the procurement of infrastructure services by governments with private participation
We formulate an incomplete contract model of PPP projects, which are assumed to provide infrastructure services paid by the government, to analyse the mechanism of ex ante moral hazard and ex post liquidation
When the special purpose vehicle (SPV) is selected through competitive bidding, we find that this method cannot prevent a moral hazard and inefficient liquidation from occurring simultaneously
Summary
Public-private partnerships (PPPs) are innovative arrangements enabling the procurement of infrastructure services by governments with private participation. This study aims to analyse the effects of renegotiation between the SPV and the bank on ex ante moral hazard and ex post inefficient liquidation by considering the nonrecourse principal and incompleteness of debt contracts features. Given the exogenous service fee, we investigate how the renegotiation between the SPV and the bank, which occurs after cost overruns have placed the project at risk, affects the SPV’s choice of strategy (moral hazard) before it falls into default and possible project liquidation after it falls into default. The basic model is extended by introducing a performance guarantee into the concession contract and termination rights implemented by the government when the SPV falls into bankruptcy. We present an incomplete contract model to examine the causes of ex ante moral hazard of the SPV and ex post project liquidation.
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