A barrier real option approach to evaluate public–private partnership projects and prevent moral hazard

This paper investigates the impact of the adoption of public support on the performance of public–private partnership (PPP) projects as perceived and measured by the different actors involved. In particular, the public support investigated by this study is put-or pay contracts, which are often used in PPP projects financed through project finance to optimize risk allocation. In order to quantify the benefit gained by each party with and without the put-or-pay contract, cash flows of the project have been modeled by using the concept of real option, defined as the right without the obligation to make an action if it is convenient to do so. This concept enabled us to model and quantify the inner flexibility mechanism of put-or-pay contracts. With a put-or-pay agreement signed between the municipality, a (private) owner, and operator of a disposal facility, the owner of the facility has the faculty, without any obligation, to require the payment of penalty, if the municipality fails to meet its obligations. This means that the owner of the facility holds a series of European put options that can be exercised if it is convenient for the holder. The developed model has been used for studying the effectiveness of put-or-pay contracts for financing the treatment plant of a special dispose through project finance, i.e., the plant for disposal of marine plant posidonia.

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Causal relationships of moral hazard and adverse selection of Ghanaian Public-Private-Partnership (PPP) construction projects

Journal of Engineering Design and Technology ◽

10.1108/jedt-12-2017-0137 ◽

2018 ◽

Vol 16 (3) ◽

pp. 439-460 ◽

Cited By ~ 2

Author(s):

De-Graft Owusu-Manu ◽

A.S. Kukah ◽

David John Edwards ◽

Erika Anneli Pärn ◽

Hatem El-Gohary ◽

...

Keyword(s):

Moral Hazard ◽

Adverse Selection ◽

Construction Projects ◽

Public Private Partnership ◽

Likelihood Method ◽

Parameter Estimates ◽

Causal Relationships ◽

Private Partnership ◽

Content Type ◽

Selection Of

PurposeThe purpose of this paper was to assess the causal relationship(s) between moral hazard and adverse selection of public–private partnership (PPP) construction projects. Structural equation modelling (SEM) was used to explore the cause and effect relationship between moral hazard and adverse selection problems in PPP construction projects in Ghana. The study produced a framework to predict, estimate and depict the complex causal relationships (i.e. the directionality) between moral hazard and adverse selection.Design/methodology/approachTo test the proposed framework, a quantitative methodology was used, in which, data were collected using research questionnaires that targeted a sample of 280 PPP stakeholders in Ghana. In total, 210 useable questionnaires were retrieved, representing a response rate of 75 per cent.FindingsThe interrelationships between the eight causes and the nine effects of moral hazard and adverse selection were established using the model. The tested framework showed the degree of association and isolation of the unobserved variables on the indicator factors. Confirmatory factor analysis (CFA) was used to evaluate the fit of items to latent constructs. Because the fit of each model was good and the item loadings were adequate, it was assumed that the indicators of the different variables factors were fitting. Furthermore, a diagnostic fit analysis was conducted using the robust maximum likelihood method to test the statistical significance of the parameter estimates.Practical implicationsThis novel research is one of the few studies investigating the causal relationships between moral hazard and adverse selection of PPP construction projects. The research concluded with future studies that seek to validate the model developed in other countries and/or other industries.Originality/valueThe research findings will serve as a guide for construction stakeholders in the PPP sector on the causes and effects of adverse selection and moral hazard and how to mitigate these.

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Fuzzy synthetic evaluation of moral hazard and adverse selection of public private partnership projects

International Journal of Construction Management ◽

10.1080/15623599.2021.2010356 ◽

2021 ◽

pp. 1-10

Author(s):

De-Graft Owusu-Manu ◽

Augustine Senanu Komla Kukah ◽

David John Edwards ◽

Ernest Effah Ameyaw

Keyword(s):

Moral Hazard ◽

Adverse Selection ◽

Public Private Partnership ◽

Fuzzy Synthetic Evaluation ◽

Private Partnership ◽

Selection Of ◽

Synthetic Evaluation

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Decision Making on Government Subsidy for Highway Public-Private Partnership Projects in China Using an Iteration Game Model

PROMET - Traffic&Transportation ◽

10.7307/ptt.v33i3.3567 ◽

2021 ◽

Vol 33 (3) ◽

pp. 399-412

Author(s):

Yujie Huang ◽

Hao Hu ◽

Jinjin Chen ◽

Lei Dai

Keyword(s):

Decision Making ◽

Private Sector ◽

Real Option ◽

Public Private Partnership ◽

Game Model ◽

Government Subsidy ◽

Private Partnership ◽

Real Option Theory ◽

Model Combining ◽

Option Theory

Government subsidy is an important responsibility of fiscal expenditure in public-private partnership (PPP) projects. However, an improper subsidy strategy may cause over-compensation or under-compensation. In this research, an iteration game model combining game theory and real option is established to describe the periodic decision-making process. The strategy game model is applied to characterize the behavioral interactions between stakeholders, and the real option theory is used to predict the project performance under the influence of their decisions. Besides, two new indicators, the efficiency of fund (SE) and the total extra cost paid by the private sector (ME), are proposed to evaluate the extra project revenue caused by each unit of the subsidy and the incentive effects of the subsidy. Consequently, the preliminary results indicate that a periodic and iterative negotiations regarding the subsidy will effectively improve the efficiency of fund compared to the traditional way. The results also show that it is important for the public sector to give incentives, encouraging the private sector to make more efforts on the project, rather than merely providing fund support. Further study will focus on more detailed and complicated behaviors of stakeholders based on the model proposed in this paper.

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Exploring strategies to reduce moral hazard and adverse selection of Ghanaian public–private partnership (PPP) construction projects

Journal of Engineering Design and Technology ◽

10.1108/jedt-05-2020-0195 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

De-Graft Owusu-Manu ◽

Augustine Senanu Kukah ◽

Frank Boateng ◽

George Asumadu ◽

David John Edwards

Keyword(s):

Moral Hazard ◽

Adverse Selection ◽

Construction Projects ◽

Technical Assistance ◽

Public Private Partnership ◽

Private Partnership ◽

Content Type ◽

Project Failures ◽

Level Of Agreement ◽

Selection Of

Purpose Conditions of inadequate and asymmetric information when an agent is hired by a principal have resulted in the problems of moral hazard and adverse selection (MHAS) in public–private partnership (PPP) construction projects. The purpose of this study is to explore strategies to reduce MHAS in PPP construction projects. Design/methodology/approach Questionnaires were used to elicit responses from respondents. Mean score ranking was used to rank these strategies while reliability analysis was conducted using Cronbach’s alpha coefficient and level of agreement tested using Kendall’s concordance. Factor analysis grouped the strategies into eight components. Findings From the mean score ranking, monitoring; transfer of risks; screening; managing of construction risks; and increased incentives to control costs were the most significant strategies. The eight components were transparent process and contract, incentives and monitoring, screening and technical assistance, unbundling and benchmarking, funding and small liabilities, information clarification and signaling, risk and contract management and cooperation and finance factors. Practical implications The findings of this study have identified the most significant strategies to reduce MHAS on PPP construction projects to serve as a guide to PPP practitioners in reducing MHAS. Originality/value The output of this research contributes to the checklist of strategies that reduce PPP project failures arising from MHAS and contributes to the development of the agency theory.

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