Determination of government guarantee and revenue cap in public–private partnership contracts

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hongyu Jin ◽  
Shijing Liu ◽  
Jun Li ◽  
Chunlu Liu
Keyword(s):  
Financial Risk ◽  
Public Private Partnership ◽  
Risk Allocation ◽  
Financial Risks ◽  
Private Partnership ◽  
Content Type ◽  
Government Guarantee ◽  
Determination Process ◽  
The Government ◽  
Private Investors

PurposeConsidering there is a lack of research in determining the optimal levels of government guarantee and revenue cap, the objective of this research is to determine their optimal levels to achieve a reasonable financial risk allocation between governments and private investors while avoiding overly lucrative conditions for private investors.Design/methodology/approachExpanded net present value (NPV) analysis and bargaining game theory are employed to construct the core of the determination process. The risk gap between governments and private investors is assessed via an expanded NPV analysis to see if the financial risk has been shared reasonably, based on which the range of the government guarantee is decided. A bargaining model is then created to help locate the optimal level of the government guarantee. Finally, a revenue cap, often combined with the government guarantee in public–private partnership (PPP) agreements, will be determined if overly lucrative conditions for private investors are observed or governments suffer a risk spillover.FindingsReferring to a real PPP project in Australia, Project BA is created to validate the applicability of the proposed determination process. The outcome shows that the proposed determination process in this paper is capable of determining the optimal levels of government guarantee and revenue cap. The government preferences towards risk allocation will influence the values of the optimal levels. Governments may also consider to alleviate the control over investors' net profits to mobilise private investors into PPP projects.Research limitations/implicationsThere is a potential possibility that the revenue cap fails to control the financial risk for governments or the overly lucrative condition for private investors. In other words, even though the revenue cap is set at the minimal level, the financial risk for governments still beyond their tolerance range or the overly lucrative condition for private investors still occurs. Future research may focus on other financial protective schemes which help to better control the financial risks for governments and profits for private investors.Originality/valueGovernment guarantees are frequently used as an investment incentive to reduce the probabilities of suffering loss for private investors. Nevertheless, the financial risks for governments may increase after providing guarantees and, as a result, revenue cap is required by governments to avoid placing themselves in an unprotected situation. By recognising the importance of the two contractual parameters, many scholars dig into their option values. However, there are very rare research works focussing on the method of determining the specific levels of government guarantee and revenue cap. To overcome the limitations of existing models and enrich the methodology for government guarantee and revenue cap determination, this paper contributes to the body of knowledge by developing a government guarantee and revenue cap determination process which contributes to a reasonable allocation of financial risks between governments and private investors.

Optimizing the concession period of PPP projects for fair allocation of financial risk

2019 ◽  
Vol 26 (10) ◽  
pp. 2347-2363 ◽  
Author(s):  
Hongyu Jin ◽  
Shijing Liu ◽  
Chunlu Liu ◽  
Nilupa Udawatta
Keyword(s):  
Financial Risk ◽  
The Body ◽  
Government Support ◽  
Risk Allocation ◽  
Fair Allocation ◽  
Optimal Length ◽  
Content Type ◽  
Determination Process ◽  
Concession Period ◽  
Private Investors

Purpose Targeting public–private partnership (PPP) projects, the purpose of this paper is to help decision makers fairly allocate financial risk between governments and private investors through a properly designed length of concession period. Design/methodology/approach On the one hand, the length of the concession period should be long enough to help private investors to achieve their expected profits. On the other hand, the length of a concession period cannot be decided without agreeing on an upper limit, since an overlong concession period takes too much time for governments to recover their investment and leads to an overly lucrative condition for private investors. Following this logic, the concession period decision range is decided, which defines the lower and upper limits for the length of the concession period. The net present values (NPVs) for governments and private investors are estimated via Monte Carlo simulation to better reflect the uncertainties. To further decide on the optimal length of the concession period, the principle of fair risk allocation between governments and private investors is adopted. The concession period, as an important project parameter, should help to minimize the financial risk gap between governments and private investors. Findings The developed concession period determination process is validated using a numerical example of a PPP transportation project. The analysis outcomes show that the proposed methodology is capable of determining the length of the concession period so as to control private investors’ profit within a reasonable range while achieving a fair allocation of financial risk between governments and private investors. The outcomes also indicate that, before determining the optimal length for the concession period, governments may need to make a choice between better financial risk allocation or stringent profit control for private investors. Research limitations/implications The determination process developed here may be inapplicable to social infrastructure PPPs where the income stream is less predictable. In addition, the data analysis targets a highway project with a capital subsidy provided by the government. To strengthen the effectiveness of the proposed determination process, further research should apply the model to PPPs with other kinds of government support. Originality/value The concession period for a PPP project is an important parameter and it is a common practice for governments to predetermine the length of the concession period before inviting tenders. The existing models for determining the concession period focus too much on the simulation of NPVs for project parties and neglect the importance of risk allocation in signing and maintaining a long-term contract. There is also a lack of research to evaluate the influence of governments’ preferences on the length of the concession period. To overcome the limitations of the existing models and enrich the methodology for concession period determination, this paper contributes to the body of knowledge by developing a concession period determination process which can help governments to make better decisions. The financial risk is expected to be more evenly shared between governments and private investors with the concession period derived from the proposed process. This determination process is also capable of evaluating the influence of governments’ preferences on the length of the concession period.

Motivations for adopting unsolicited proposals for public-private partnership project implementation

2018 ◽  
Vol 23 (2) ◽  
pp. 221-238 ◽  
Author(s):  
Robert Osei-Kyei ◽  
Albert P.C. Chan ◽  
Ayirebi Dansoh ◽  
Joseph Kwame Ofori-Kuragu ◽  
Emmanuel Kingsford Owusu
Keyword(s):  
Public Sector ◽  
Developed Countries ◽  
Public Private Partnership ◽  
Project Implementation ◽  
Private Partnership ◽  
Content Type ◽  
The Public ◽  
Private Investors ◽  
Push And Pull ◽  
Specific Country

Purpose The purpose of this study is to explore the motivations of governments for adopting unsolicited proposals for public–private partnership (PPP) project implementation. Design/methodology/approach A comprehensive review of literature was conducted to derive a list of motivations for adopting unsolicited PPPs. Subsequently, an empirical questionnaire survey was conducted with international PPP experts. Inter-rater agreement analysis, mean significance index and independent two-sample t-test were used for data analysis. Findings Results reveal four very critical motivations for governments’ interest in unsolicited PPPs; these include: “enhanced private sector innovation and creativity in PPPs”; “lack of public sector capacity to identify, prioritise and procure projects”; “lack of private investors’/developers’ interest in projects at remote areas”; and “rapid implementation of PPP projects”. Further analysis shows that developing and developed countries view the significance of three motivations differently. Research limitations/implications The major limitation lies in the fact that this study only focused on the general motivations/rationale for using unsolicited PPP proposals and did not thoroughly examine and consider the inherent property of motivations (i.e. push and pull theories). Therefore, future studies should explore the “pull and push” motivations for adopting unsolicited PPPs within a specific country or region. Originality/value The research outputs inform international private developers of the key expectations of governments/public departments when submitting unsolicited PPP proposals for consideration by the public sector. Furthermore, the outputs will enable governments/public departments and private proponents to derive performance objectives and standards for unsolicited PPP projects.

Managing financial risks to improve financial success of public—private partnership projects: a theoretical framework

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Isaac Akomea-Frimpong ◽  
Xiaohua Jin ◽  
Robert Osei-Kyei
Keyword(s):  
Empirical Studies ◽  
Theoretical Framework ◽  
Public Private Partnership ◽  
Empirical Literature ◽  
Financial Risks ◽  
Financial Returns ◽  
Financial Success ◽  
Private Partnership ◽  
Content Type ◽  
Desirable Outcome

Purpose Successful execution of public–private partnership (PPP) projects is the most desirable outcome to all stakeholders. Previous studies show that one of the topmost obstacles to fulfil this desire on the project is financial risks. Nonetheless, inadequate holistic studies exist on linking the management of this challenge to the financial returns of the project. This study aims to develop a theoretical framework interrelating financial risks, financial controls and financial performance of PPP projects. Design/methodology/approach The theoretical framework is informed and supported by existing theories and previous empirical studies from construction management, finance and economics. The underlying theories captured in the framework were chosen for their relevance and applicability to PPP projects. The propositions developed from the analysis of the theories and the empirical literature are summarised in three main hypotheses and 26 operationalised sub-hypotheses. Findings The major elements of the framework include the financial risks and 12 sub-themes which are commonly experienced on PPP projects. Financial policies and procedures on controlling financial losses of the projects are also included in the framework. Lastly, this study creates financial criteria on the projects which are intrinsically embedded in the framework to serve as benchmark to support the measurement of financial success. Research limitations/implications This study is a theoretical review of classical theories and empirical studies, and therefore, not all researches and managerial controls have not been included in this framework due to restricted time and limited studies on the topic. Practical implications This paper would serve as a multidimensional guide to project managers to mitigate financial risks and hopefully enhance the financial success of PPPs. Theoretically, this paper outlines the dimensions of managing financial risks of PPPs that require valid and reliable measurement to test the interrelationships of the constructs by further studies in the construction research community. Originality/value This theoretical framework makes ambitious efforts to embrace multifaceted theories from different disciplines to shed light on holistic mechanisms to mitigate financial risks to improve financial returns of PPP projects.

scholarly journals Financing for a Sustainable PPP Development: Valuation of the Contractual Rights under Exercise Conditions for an Urban Railway PPP Project in Korea

2019 ◽  
Vol 11 (6) ◽  
pp. 1573 ◽  
Author(s):  
Kangsoo Kim ◽  
Hyejin Cho ◽  
Donghyung Yook
Keyword(s):  
Financial Risk ◽  
Financial Burden ◽  
Economic Value ◽  
Private Partnership ◽  
Low Probability ◽  
The Republic ◽  
The Government ◽  
Private Investors ◽  
Contractual Rights

The Minimum Revenue Guarantee (MRG) was designed to mitigate the financial risk of private investors that participate in the transportation project as concessionaire under a public-private partnership (PPP) program. The MRG can pose a significant financial burden to governments especially when the contract revenue is set considerably higher than the actual revenue. This may encourage the concessionaire to inflate the traffic forecast to make the project look as if it will be profitable. In order to mitigate this problem, extra conditions for exercising the MRG can be considered. This study examines how these exercise conditions change the economic value of the MRG using the case study based on the urban railway project in the Republic of Korea. By utilizing the real options analysis, the study identified that the exercise conditions have worked to curtail the expected payment from the government, eventually leading to a reduction in the concessionaire’s expectation of revenue. The value of MRG was at a far lower level compared to the concessionaire’s investment because of the low probability of exercising the MRG when the exercise conditions apply. The findings are expected to contribute to the sustainability of the PPP program by recognizing and quantifying liabilities and risks embedded in the concession agreement in advance.

scholarly journals Factors determining the success of public private partnership projects in Nigeria

2016 ◽  
Vol 16 (2) ◽  
pp. 42-55 ◽  
Author(s):  
Afeez Olalekan Sanni
Keyword(s):  
Policy Development ◽  
Success Factors ◽  
Good Governance ◽  
Implementation Process ◽  
Public Private Partnership ◽  
Political Support ◽  
Risk Allocation ◽  
Public And Private ◽  
Private Partnership ◽  
The Government

The implementation of public private partnership (PPP) procurement method is expected to help governments in the development of infrastructures and provides an opportunity for the reduction in the governments’ debt profiles. This method has been adopted in Nigeria for more than a decade and with these years of implementation, few infrastructural projects have been developed using this method while some have been unsuccessful. This study aims to examine the PPP projects implementation in Nigeria and identify the most critical factors that could determine the success of such projects. A total of 184 questionnaires were received from public and private sectors’ participants in the implementation of PPP projects. An exploratory factor analysis identified seven critical success factors as projects feedback, leadership focus, risk allocation and economic policy, good governance and political support, short construction period, favourable socio-economic factors, and delivering publicly needed service. This study shows that more developmental projects could be delivered through PPP if the government could focus on these main factors in the implementation process. The result will influence policy development towards PPP and guide the partners in the development of PPP projects. 

scholarly journals PRINSIP PROPORSIONALITAS DAN GOVERNANCE TERHADAP ALOKASI DAN TRANSFER RISIKO DALAM SKEMA KERJASAMA PUBLIC-PRIVATE PARTNERSHIP (PPP)

Yuridika ◽  
2017 ◽  
Vol 32 (3) ◽  
pp. 541
Author(s):  
Yuniarti Yuniarti ◽  
Fifi Junita
Keyword(s):  
Risk Sharing ◽  
Public Private Partnership ◽  
Government Support ◽  
Risk Allocation ◽  
Infrastructure Development ◽  
Transfer Scheme ◽  
Private Partnership ◽  
Force Majeure ◽  
The Government ◽  
High Level

The high level of Foreign Direct Investment (FDI) is also supported by the availability of infrastructure to the remote area where the investment will be implemented. However, with limited funds from both APBN and APBD, infrastructure development can not be fully done by the government. Therefore, the government will cooperate with the investor (private) in the implementation of infrastructure development known as public private partnership. The main problem in implementing PPP is the allocation of risk to PPP projects. The different bargaining positions between the government and the private sector resulted in the fact that most of them impose risks on private parties (private). Implementation of PPP is closely related to the emergence of various risks including and not limited to regulatory risks, force majeure, etc. If there is no risk allocation arrangement proportionally based on governance principles, it weakens the pattern of PPP cooperation in Indonesia. PPP as one form of risk sharing in infrastructure investment should not release the role and government support to private parties / investors. Even in practice, PPP implementation in Indonesia only relies on BOT (Build Operate and Transfer) scheme which is expected to minimize government support in project implementation. This will ultimately lead to project failure.

scholarly journals Delivering Countywide Cost-Effective and Better Education Services: The Models of Public Private Partnership (PPP)

2019 ◽  
Author(s):  
Md. Mahmudul Alam ◽  
Abu Rashed
Keyword(s):  
Social Services ◽  
Capital Investment ◽  
Cost Effective ◽  
Public Private Partnership ◽  
Private Partnership ◽  
Education Services ◽  
The Government ◽  
Increasing Demand ◽  
Private Investors ◽  
Operation Phase

Like other social services, education is one of the essential services that government is obliged to arrange for its country people, but to meet such increasing demand of educational infrastructures, government alone faces hues difficulties in capital investment especially in the developing countries. So, for developing the education infrastructure and providing quality education programmes, Public Private Partnership (PPP) has been proven an advanced tool for government in many of the countries. However, private investors may not have much interest for a typical PPP deal in education sector, because government provides the education services for free at the primary and secondary level. Therefore to make the PPP deal attractive to private investors, this paper suggests two approaches of PPP funding under the Built Operate and Transfer (BOT) models. Both the Viability Gap Funding (VGF) and Annuity Payment provide the investors the required subsidy from the government through payment in the construction or operation phase to make the project viable. This allows private investors to make revenue at expected level and government to save of hues up-front investments. Moreover, among different types of PPP models, the suggested types – BOT - also ensures the quality of education programmes.

Performance Efficiency Measurement of Airports

2021 ◽  
pp. 748-767
Author(s):  
Anil Kumar ◽  
Manoj Kumar Dash ◽  
Rajendra Sahu
Keyword(s):  
Efficiency Score ◽  
Public Private Partnership ◽  
Data Envelopment ◽  
Institutional Barriers ◽  
Private Partnership ◽  
Efficiency And Effectiveness ◽  
Overall Efficiency ◽  
The Government ◽  
Using Data ◽  
Private Investors

This article describes how to improve the overall efficiency and effectiveness of the aviation sector and also to source extra funding, the Government of India has paved the way for private investors through to a Public Private Partnership (PPP) model since the 1980s. This liberalization step in the Indian aviation market has minimized the institutional barriers which have hindered the freedom and flexibility of air transport operations among private investors. Now, competition within the aviation sector has become fiercer; the Airports Authority of India (AAI) and Public Private Partnership (PPP) in Indian airports are not only providing varied services, but also attracting consumers with new infrastructure and full modern facilities. The importance of this article is because after privatization, no studies have been conducted to examine the efficiency of Indian airports by using Data Envelopment Analysis (DEA). An output-oriented DEA model is employed to determine the efficiency score of airports by taking a sample of 15 airports, including airports run by PPP, for comparison. Output-oriented DEA calculates the efficiency by maximizing the outputs for a given level of inputs. Therefore, this article contributes to the existing literature on Indian airports. Based on available data, three variables - length of runways, terminal size and number of check-in counters, are used as inputs and two variables - passenger movement and aircraft movement, are used as outputs.

Factors influencing the adoption of public–private partnership in low-cost housing development in Myanmar

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
The Su Nyein ◽  
Bonaventura H.W. Hadikusumo
Keyword(s):  
Influencing Factors ◽  
Low Cost ◽  
Public Private Partnership ◽  
Financing System ◽  
Private Partnership ◽  
Content Type ◽  
Factors Affecting ◽  
Housing Projects ◽  
Low Cost Housing ◽  
Private Investors

Purpose To provide low-cost housing, the Myanmar Government is attempting to use public–private partnership (PPP) to attract private investors. However, there is little information concerning the influencing factors for implementing PPP low-cost housing projects in Myanmar. This paper, therefore, aims to identify and analyse these factors. Design/methodology/approach A total of 51 in-depth interviews were conducted with interviewees involved in various kinds of housing projects implemented through the adoption of PPP or other approaches. The methods of data collection and the analysis are based on grounded theory (GT) methodology. Findings Using the GT method to analyse the interviews, five categories emerged from 50 influencing factors regarding the establishment and implementation of the PPP model for low-cost housing in Myanmar: provision of incentives; obstacles in implementing PPP for all stakeholders; barriers to private sector participation; public sector responsibilities and challenges; and attraction factors and challenges for financial institutions. Among 12 newly found factors, the three most important for PPP low-cost housing in Myanmar are the availability of project funding, the resolution of land-acquisition issues and the development of a sound financing system. Research limitations/implications Our findings strengthen previous studies by identifying factors affecting PPP low-cost housing either specific to Myanmar or common among other countries. Of the 50 factors identified, 38 factors were found in previous studies, but 12 are likely specific to Myanmar. Practical implications Our findings can be used by governments, particularly the Myanmar Government, and financial agencies to understand the low attractiveness of PPP low-cost housing for investors and to develop/improve policies to stimulate PPP low-cost housing, especially in Myanmar. Originality/value Many previous studies have been undertaken to identify factors that influence the implementation of PPP for low-cost housing. However, to the best of the authors’ knowledge, there are no prior studies specific to Myanmar in this context.

scholarly journals Government Guarantee Decisions in PPP Wastewater Treatment Expansion Projects

Water ◽  
2020 ◽  
Vol 12 (12) ◽  
pp. 3352
Author(s):  
Liguang Wang ◽  
Asheem Shrestha ◽  
Wen Zhang ◽  
Guangbin Wang
Keyword(s):  
Wastewater Treatment ◽  
Decision Model ◽  
Public Private Partnership ◽  
Unit Price ◽  
Private Partnership ◽  
Service Demand ◽  
Government Guarantee ◽  
The Government ◽  
Exclusive Right

Public private partnership (PPP) models are often used in delivering wastewater treatment (WWT) projects. When existing PPP projects need expansion due to higher demand for WWT, in many cases, the expansion may involve a new PPP contract involving a new concessionaire. Expansion PPPs have unique challenges as the sharing of responsibilities and risks can become complex. The complexities are further exacerbated when there are government guarantees involved. Structuring inappropriate guarantees can often lead to high costs for the government. This study focused on the choice of government guarantee in PPP expansion projects in the WWT sector by examining two popular guarantee mechanisms: minimum revenue guarantee and exclusive right. A decision model was developed and applied in a real WWT expansion PPP project in China to illustrate the optimal guarantee under varying circumstances related to service demand, expected unit price, and the existing guarantees in the existing PPP project. The contribution of the study lies in the applicability of the model to facilitate better decisions for the government in selecting the optimal guarantee mechanism in PPP expansion projects.

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