The Research On China's Water Industry Finance Contract

The market economy is essentially the contract economy, so to establish an effective contract system of the socialist is one of the important direction of market economic reform. This paper mainly studies the high transaction costs caused by the incomplete water contract finance, how to choose the optimal contracts and how to design institutional arrangement of the best contract. For a long time, China's water supply industry faces the problems of low operating efficiency and inadequate investment fund, the underlying reason is that the financing needs of water sector had not been met in the capital markets. Therefore, the government, through the introduction of a franchise agreement, established the market financing model of water sector.The water financial contracts, based on the franchise rights, are the contract game among different players (Element owner), Participants include: government, water enterprises and investors. It is actually a kind of incomplete contracts, when financing contract were signed beause of the contracting environment, limited rationality, the human factor and the time factor, the signature and the implementation process of the financing contract exist high transaction costs, while the government, water supply enterprises and investors have different objective function, under the limited rational assumption ,when marginal transaction cost of financing contract is greater than the marginal private revenue the optimal choice is to brake; Through the introduction of three water financing cases this paper proves the existence of high transaction costs in our water supply, which is caused by the incomplete contract , this may eventually lead to the failure of the contract financing.Due to incomplete contracts, and the government faces different choices: short-term financing or long-term financing; equity financing or debt financing, this paper make a comparative analysis of these four contracts and eventually reach a conclusion. And finally lists some suggestion to optimize water contract finance from three aspect: lowering transaction costs, perfecting system arrangement and clearing the right and duty of the government.