Abstract
Sustainable operation of public-private partnership (PPP) infrastructure projects that are characterized by considerable external benefits is of vital importance. However, a liquidity shock might trigger an inefficient liquidation of a project by the special purpose vehicle (SPV) and the bank, whose objectives are to maximize the profits generated by the project. This study argues that performance guarantee and subsidy policies implemented by the government play a role in encouraging socially efficient decision-making by the SPV and the bank to ensure the continuation of socially valuable projects. The results show that both government subsidy and performance guarantee policies are effective in avoiding the inefficient liquidation of PPP infrastructure projects when the external benefits are large and certain. However, a performance guarantee policy might lead to inefficient continuation when the external benefits of a project are uncertain. Finally, we discuss the possibility that an integrated policy combining performance guarantees and government subsidies improves the efficiency of a PPP infrastructure project.
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