Optimisation of government subsidies in infrastructure public-private partnerships

Abstract

PurposeThis study aims to develop a Stackelberg Game Model for seeking the optimal subsidy plans with varying levels of government financial capability (GFC). Furthermore, the scenario-based analysis is conducted and will enable governments to identify a comprehensive subsidy plan as follows: improve project performance and optimise social welfare.Design/methodology/approachA Stackelberg Game Model is developed to optimise the effectiveness of subsidies on the performance of public-private partnerships (PPPs).FindingsAccording to the scenarios that are generated from the model, governments that are confronting with limited public budgets could reduce the intensity of performance incentives and increase the participation-oriented subsidy. Whilst a participation-oriented subsidy can stimulate private organisations’ willingness to participate in infrastructure PPPs, a performance-oriented subsidy is capable of facilitating the projects’ performances. Intuitively, the performance-oriented subsidy enables the private entities of PPPs to improve their efforts on the projects to realise higher profits. However, the participation-oriented subsidy is unable to affect the level of their effort spent on the projects. To satisfy both parties’ expectations in a PPP, the performance-oriented subsidy needs to be prioritised for a purpose of enabling higher quality outputs.Practical implicationsThe game model developed in this study contributes to the literature by offering new insight into the underlying mechanism of governments and private entities, in terms of their decision-making for subsidy planning and contributions (i.e. resource allocation and spending) during the life-cycle of PPPs. This research enriches the government subsidy model by revealing the effects of the GFC and clarifies the impacts of two different schemes of subsidy on the performance of PPPs.Originality/valueThe government has been conventionally viewed as being omnipotent to provide PPPs with a wide range of subsidies. However, the subsidies are not unlimited, due to GFC. In addressing this void, this study has modelled the impacts of government subsidy plans with a consideration of GFC-related constraints. The combined effects of the participation- and performance-oriented subsidies on the project performance of PPPs have been examined.