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

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.

Government Guarantee Decisions in PPP Wastewater Treatment Expansion Projects

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.

The impact of old-age pensions on the happiness level of elderly people – evidence from China

As an important source of income for elderly people, pensions have a great impact on their wellbeing. There are three different pension systems in China (the Old-age Insurance System for Government Agencies and Institutions (OISGAI), the Basic Old-age Insurance System for Urban Employees (BOISUE) and the Social Insurance of the Old-age Pension for Urban and Rural Residents (SIOPURR)). This study empirically analyses the impact of various pension types on the happiness of elderly people in China and further explores the potential impact mechanism using the 2014 China Family Panel Studies data. The study suggests that first, receiving pensions from OISGAI, BOISUE and SIOPURR is positively correlated with the happiness level of elderly people. Second, the sense of happiness of elderly people who receive BOISUE is higher than that of those receiving SIOPURR, which is mainly caused by the difference in the level of pension benefits. When the level of benefits is controlled for, there is no significant difference between these two groups. Third, when they have the same level of pension benefits, the happiness of elderly people who receive OISGAI is significantly higher than that of those who receive pensions from the other two systems, which is possibly related to the hidden ‘special’ government guarantee and the difference of the growth rate of the benefit level.

VALUE OF INVESTORS’ ESCALATION OF COMMITMENT IN PPP PROJECTS USING REAL OPTION THINKING

Escalation of commitment (EOC) is a common behavior among investors who receive negative feedback (NF) in public-private partnership (PPP) projects, and this behavior typically leads to sizable losses. Recognizing this, investors set a mental threshold and track investments for escalation. Once losses reach the threshold, investors will terminate the escalation behavior, namely, they will transfer projects to governments to obtain compensation or residual asset value. This paper analyzes the maximum amount of NF that investors can sustain based on a belief-adjustment model, followed by the analysis of the greatest loss degree. Then, a threshold model for EOC is constructed using real option thinking. Different from the usual judgment criteria of the traditional option method, the threshold is less than zero in the EOC scenario. The results show that the threshold correlates with the initial generative cognition, the sunk cost level, the degree of the government guarantee and investors’ behavioral preferences as well as with total investment and return on investment. These findings serve as a reference for governments to de-escalate investors’ commitment in PPP projects.

CHILDREN FRIENDLY SCHOOLING TO FULFILL THE RIGHT TO EDUCATION

Children are heir of a nation’s future. Therefore, they ought to be comprehensively prepared both physically and psychologically in order to reach desired adulthood. Parents, trustee, and teachers together play important roles in this regard. To reach impeccable adulthood, fulfilling certain education extenthas been serving obligatory purpose since long time ago. Generally, one child’s education and well-being have been parent’s responsibility. However, stateguarantees every child access to proper education fulfillment, as it is written on UUD 1945 article 28 C, which ensures citizen development via basic physical needs fulfillment, including getting education and benefit from science, art, and cultural advantages in order to improve quality life. Yet in the middle of the process, sometimes they face obstacles in form of physical and psychological harassment. It can be, they find it delivered through playing groups, teaching teams, or surrounding adults. The complication has to be ignorance to education in general and school reluctant specifically. If the effect carries over they would eventually loss the opportunity of getting education rights served right.This paper aims to study access to education in general, harassment in school environment, and children-friendly school as an effort to fulfill education rights.According to the study the author concludes that education rights serve as one of human rights. Consequently, government guarantee its access to ensure education rights served right, including carrying out feasible actions and countermeasure to prevent and resolve problems in the society. The author would like to suggest children-friendly schooling in every city or regency in Indonesia.Key words: children rights, education rights, children-friendly school