Research On Public-Private Partnerships Based On Contract Theory

Being as a reform in infrastructure and public service supply mechanism increasing most rapidly worldwide in the last 10-20 years, Public-Private Partnerships are long-term partnerships between the public sector and private organization launched by the government, which involve assignment of the responsibilities of financing, construction and operation in specific infrastructure project. As institutional innovation, PPPs have three features, responsibility integration, risk transfer and incomplete contract. PPPs lead marketization into public realm in order to integrate the resources in the public and private sectors, take the advantage of private finance and management resources, relax the public financing restriction, so as to fulfill the VFM(Value-For-Money). They contribute to solution to the bottleneck of China's economy, and provide solid foundation for the persistent economic development through improvement of infrastructure and efficiency of public service. Since the beginning of this century, China's government actively put the marketization policy of the public sector into effect, in sharp contrast to the status of bog down of PPPs. The reason is that China's government, investors and citizens all lack deep understanding to the function and its processing mechanism of PPPs. Besides, both the deficiencies of laws and policies and the lag of organizational reform of the public section result in the failure of PPPs'expansion up to now.The thesis considers concretely the economic and institutional characteristics of China on the foundation of the present literatures. Regarding contracting as the foundation of PPPs, with the basic hypothesis of contractual incompletion throughout the thesis, and by setting up theory models of PPPs institutions and contracts, we investigate the core problem with practical application of PPPs, so as in the direction of superior mechanism design to argue contracting form that fulfills social welfare maximization in an infrastructure project. The contracting solution includes the arrangement of control rights, the decision of investment plan, the allocation of returns and risks, and the promotion of ex post coordination. We not only combines the static and dynamic analysis, but also put economic and political factors together, in order to actually provide necessary theories for PPPs application to such a special developing country as China, together with offering an important reference for the decision-making of government and private organizations.This thesis is mainly of theoretical research assisted with case study. The essential reasoning in this thesis is, firstly processing research and review of massive literature, and then bringing forward the research standpoint and the issue we mainly investigate, with comprehensive utilization of game theory, organization economics, incomplete contract theory, regulation economics and political economics. We propose theoretical models with references to interrelated literatures, and discuss the necessity, possibility and complexity of private participation in infrastructure as a reasonable institutional innovation in China, with the characteristic of China taking into account. The end passes to the concluding remarks of the thesis.The main contents and conclusions of the thesis are summarized as follows:(1) An overview of the concept, theory foundation and related research of PPPs is presented firstly. By review of sources of PPPs'efficiency, we find that PPP can introduce market mechanism to public realm, and utilize the management and financial resources in the private sector. Under certain condition PPPs could be the institutional innovation to improve the efficiency of infrastructure and public service supply, and then to promote social welfare citizens possess. According to the complexity of PPPs, The implemented efficiency of PPPs is not only under the influence of political environment and institutional quality, but also is connected with the essential characteristics of PPPs, contracts and regulations design, and allocation of project risks. As an economic theory developed rapidly in the last several dacades, contract economics is really helpful to investigate the integrated cooperative mechanism established between public and private section.(2) Chaper 3 investigates the relative advantage of PPPs as an institutional choice, so as to ensure the necessity of the PPP reform. Assume the contract is incomplete, and quality of the infrastructure and the public service are both source of social welfare in public service supply. We analyze when PPP is more favorable to promote the innovations in the infrastructure project by comparing different modes of public services supply. We find that the positive externality of the construction innovation to the operations revenue, the consistency of the social value and the financial value of the innovations, and the innovational capability advantage of the private partner are important factors. The scope of PPP dominating traditional public supply mode is hence induced.(3) Chaper 4 solves the PPP financial contract choice for the government, including the investment arrangement and operational revenue allocation, in order to prove the feasibility of PPP implementation. Assuming that financial restriction is main reason of cooperation between the government and the private finance, we focus on the effect of informational contracting condition on a PPP contract and its efficiency. The result shows that, no matter whether the operational revenue is contractible, the financial restriction and project risks are both factors influencing the choice the government makes to introduce private finance. More private finance means more revenue sharing. When the operational revenue is uncontractible, the typical PPP contract that private organizations finance all the project investment and gain all the operational revenues is both optimal choice of the government and social efficient. Besides, the limitation of institutional guarantee could cause invalidation of the initial contract and reduce the participation desire of the private finance.(4) Chapter 5 classifies two different kinds of government responsibilities in the most prevalent contract forms of PPPs on the foundation of explicit definition of government commitment risk, and explains the reason why government commitment risk arises by analyzing the institutional origin. Assuming that the government agent has private benefit of control rights and has full bargaining power in renegotiation, we analyze the logics of PPP commitment risk and the social inefficiency it causes. In concession contracts of PPPs, by introducing government's assistant effort which influence the operational payoff, we propose a moral hazard model with the government to induce another kind of social inefficiency of PPPs.(5) Due to the suboptimal effort level of the private agent and the renegotiation cost of project modification in the formal PPP contracts, chapter 6 investigates the likelihood of implicit contracting mechanism of PPPs in dynamic setting, and solves the incentive restriction and ex post maladjustment problems of PPPs with the interplay of implicit contract and explicit contract. The result shows that, considering the potential transaction payoffs in the future, the implicit contract can sustain in PPPs to promote the social effective effort level of private agent under certain conditions, and endow the government with more surplus share when renegotiation, therefore to fulfill more effective social welfare. Higher possibility of contract modification or more surplus improved, or higher monetary payoff share the private agent can gain via her effort, are the driving force to establish implicit contract in PPPs.The main innovations of this thesis include:(1) This thesis extends the theories of PPPs founded by Hart(2003)and Bennett & Iossa(2006), making reasonable modifications to the innovative efforts of private agents and reformed public agents, emphasizing at the same time possibility of systemic distinction in the public and private sectors when implementing innovations. The relative advantage of PPPs is hence clarified, along with the necessay conditions to establish a PPP.(2) Literature in financial contracts of PPPs between public and private sector are almost absent, and the private financing character of PPPs is always overemphasized. So the thesis solve how to choose the optimal financial contract of PPPs in different contracting conditions as a government agent with financial difficulty, and prove that the typical PPP contract that the private organizations finance all the project investment and gain all the operational revenues is a social efficient equilibrium.(3) The thesis takes the contractual incompleteness as a common origin of different government commitment problems based on two kinds of PPP contracts--- government purchasing contracts and concession contracts, and clarify the social inefficiency it causes. The research is helpful for the control of government commitment risk, and provides insights to the efficiency of PPPs reform.(4) The thesis investigates the implicit contracting mechanism to facilitate ex post adaptation and private effort on the foundation of repeat transactions possibility in PPPs long-term cooperation. This is a breakthrough from the formal contracting research of PPP. Therefore, the interplay of implicit contract and explicit contract is a effective way to improve PPPs'to solve the incentive restriction and ex post maladjustment problems.