The Soft Budget Problem And Contract Efficiency In State-owned Enterprises Participating BOT Projects

BOT project scheme has been widely used in infrastructure construction in China. Due to 2008 financial crisis which influenced the China economy, the government has started to launch an economic stimulus plan with an amount of 4 trillion Yuan in order to promote economic development. Most of the capital in the plan is considered to be adopted into the infrastructure construction. Consequently BOT scheme will be used more widely as the main pattern in infrastructure construction projects. However most infrastructure construction projects are in charge of state-owned enterprises due to planned economic system in our country. Researches in the past have shown that a soft budget problem exists in the state-owned enterprises operating economy. Under the background above, our research on how the state-owned enterprise win the BOT project concession contract and efficiency analysis of the state-owned enterprises in BOT projects is essential from the practical point of view.In this paper, we analyze the characteristics of BOT scheme and the possibility of liquidity shock arising from the external environment through literatures study. We analyze the benefits and limitations of the government's subsidy policy and deposit policy when the liquidity shock happened. Furthermore, we present hybrid policy which combines the two policy advantages and avoid their shortcomings.The government's subsidy policy leads to soft budget problem, especially in state-owned enterprises. In order to explain the current status that the state-owned enterprises monopolize large-scale infrastructure BOT projects, we build a model which shows how the state-owned enterprises win BOT project concession contract in competition with private company. Based on this model, we furthermore analyze the economic impacts of the state-owned enterprises implementation of BOT projects on efficiency. In this paper, we finally focus on the monitoring role of banks. An incomplete BOT contract model is built to explain banks'role on deterring the soft budget problem. We find that a proper amount of subsidy provides an incentive to banks to monitor the project, subsequently the soft budget problem is avoided.