Early Termination Compensation Under Demand Uncertainty In PPP Projects

Along with the world-wide application of Public-Private Partnership,problems such as high cost,long construction and operation period and complex interests of all parties gradually emerged as the same time.The frequent occurrence of early termination in PPP projects and its compensation determination have gained both theoretical and practice circles' attention.For an early terminated project,a reasonable compensation is considered the core issue that affects the interests of both the government and the private sector.The existing early termination compensation methods,to some degree,lack of ex-ante thoughts,leading to endless compensation discussions,poor project service and loss of both parties' interests.Through formal research of renegotiation and early termination of PPP projects,it is found that the project's demand risk is one of the important factors restricting the development of PPP projects.This study aims at dealing with the uncertainty in project demand by applying Monte Carlo simulation,where annual demand and annual growth rate of the project are considered as the risk input variables to provide a reference for forecasting annual demand in the remaining concession period and determining compensation in case of the early termination of the project.Scenarios where the PPP project is early terminated by government default or government initiative buyback are discussed.When the early termination occurs,the annual compensation is determined by the jointly agreed compensation mechanism,which is established beforehand based on the reference demand and cumulative probability.Further,total compensation is calculated by discounting and applying the net present value and Monte Carlo simulation.This study aims to establish an ax-ante early termination compensation mechanism for PPP projects.By clarifying in advance,endless discussions on the compensation can be avoided when the early termination occurs.The interests of both parties will be protected,and the performance and operation efficiency of the project will be guaranteed.In the long run,the early termination compensation mechanism proposed in this study provides a new idea for the operation and supervision of PPP.Besides,it provides practical guidance for the investment and financing of infrastructure construction projects.