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Mathematical Problems in Engineering
Volume 2018, Article ID 3631270, 13 pages
https://doi.org/10.1155/2018/3631270
Research Article

Contractual Efficiency of PPP Infrastructure Projects: An Incomplete Contract Model

1Department of Construction Management, Dalian University of Technology, Dalian 116024, China
2Disaster Prevention Research Institute, Kyoto University, Kyoto 611-0011, Japan
3Graduate School of Management, Kyoto University, Kyoto 606-8501, Japan
4Faculty of Management and Economics, Dalian University of Technology, Dalian 116024, China

Correspondence should be addressed to Lei Shi; nc.ude.tuld@ihsiel

Received 19 June 2017; Accepted 18 February 2018; Published 30 April 2018

Academic Editor: Ibrahim Zeid

Copyright © 2018 Lei Shi et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This study analyses the contractual efficiency of public-private partnership (PPP) infrastructure projects, with a focus on two financial aspects: the nonrecourse principal and incompleteness of debt contracts. The nonrecourse principal releases the sponsoring companies from the debt contract when the special purpose vehicle (SPV) established by the sponsoring companies falls into default. Consequently, all obligations under the debt contract are limited to the liability of the SPV following its default. Because the debt contract is incomplete, a renegotiation of an additional loan between the bank and the SPV might occur to enable project continuation or liquidation, which in turn influences the SPV’s ex ante strategies (moral hazard). Considering these two financial features of PPP infrastructure projects, this study develops an incomplete contract model to investigate how the renegotiation triggers ex ante moral hazard and ex post inefficient liquidation. We derive equilibrium strategies under service fees endogenously determined via bidding and examine the effect of equilibrium strategies on contractual efficiency. Finally, we propose an optimal combination of a performance guarantee, the government’s termination right, and a service fee to improve the contractual efficiency of PPP infrastructure projects.