Optimal readjustment of contract variables and the financial outcome of PPP projects in the operation period

Abstract

Contract readjustment and renegotiation are inevitable in PPP projects. Tolls, concession length, and government subsidies are the three main variables that provide a set of Pareto payoffs for the private sector and the government during the operation period. This study provides a bargaining approach based on game theory to fairly determine the payoff parties and optimally readjust the contract variables. Unlike previous studies, this model provides a unique optimal solution in all three negotiation areas including Pareto-compensation bargaining, Pareto-improving bargaining, and Pareto-sharing bargaining. The results indicate that the initial forecast range of private profit and expected payoff parties based on the actual performance have significant impacts on the final output. Contrary to popular belief, receiving a higher guarantee from the government in the contract can lead to a reduction in the private's share during the operation period, if excess profits are made. Similarly, reducing the profit cap in the contract can benefit the private sector in the case of a profit shortfall. This model can support strategic renegotiations and provide a fair and optimal structure to readjust contract variables which will facilitate and expedite the decision-making process.