IDEAS home Printed from https://ideas.repec.org/a/eee/transa/v117y2018icp158-175.html
   My bibliography  Save this article

Pareto optimization of public-private partnership toll road contracts with government guarantees

Author

Listed:
  • Song, Jinbo
  • Zhao, Yunpeng
  • Jin, Lulu
  • Sun, Yan

Abstract

Government guarantees are frequently used in public-private partnership (PPP) toll road projects to attract private sector partners. In this paper, we propose a multi-objective programming model for Pareto-optimal decision in which the toll, quantity demanded, private firm’s profit and social welfare are investigated, and compare the effectiveness of exclusivity guarantees and minimum demand guarantees in PPP contracts. Under certain assumptions, we find that for any government guarantee, the Pareto-optimal toll lies in between the toll set by private firms and socially optimal toll; in addition, the Pareto-optimal toll is higher and monopoly power is stronger under minimum demand guarantee if the relative negotiating power of private firms is sufficiently high. Both the private firm’s profit and social welfare depend on relative negotiating power, buyback price, marginal social cost and minimum quantity demanded. In particular, if the minimum quantity demanded and the buyback price are sufficiently high, the government will tend to provide exclusivity guarantee but not minimum demand guarantee. A policy implication of this result is that it is not always the best choice for the government to provide a minimum demand guarantee to private firms.

Suggested Citation

  • Song, Jinbo & Zhao, Yunpeng & Jin, Lulu & Sun, Yan, 2018. "Pareto optimization of public-private partnership toll road contracts with government guarantees," Transportation Research Part A: Policy and Practice, Elsevier, vol. 117(C), pages 158-175.
    • Handle: RePEc:eee:transa:v:117:y:2018:i:c:p:158-175
    DOI: 10.1016/j.tra.2018.08.019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0965856418301563
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.tra.2018.08.019?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2013. "The Basic Public Finance Of Public–Private Partnerships," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 83-111, February.
    2. Tan, Zhijia & Yang, Hai & Guo, Xiaolei, 2010. "Properties of Pareto-efficient contracts and regulations for road franchising," Transportation Research Part B: Methodological, Elsevier, vol. 44(4), pages 415-433, May.
    3. Niu, Baozhuang & Zhang, Jie, 2013. "Price, capacity and concession period decisions of Pareto-efficient BOT contracts with demand uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 53(C), pages 1-14.
    4. Meng, Kai & Lou, Peihuang & Peng, Xianghui & Prybutok, Victor, 2017. "Multi-objective optimization decision-making of quality dependent product recovery for sustainability," International Journal of Production Economics, Elsevier, vol. 188(C), pages 72-85.
    5. Feng, Zhuo & Zhang, Yiwen & Zhang, Shuibo & Song, Jinbo, 2018. "Contracting and renegotiating with a loss-averse private firm in BOT road projects," Transportation Research Part B: Methodological, Elsevier, vol. 112(C), pages 40-72.
    6. Feng, Zhuo & Zhang, Shui-Bo & Gao, Ying & Zhang, Shuai-Jun, 2016. "Subsidizing and pricing private toll roads with noncontractible service quality: A relational contract approach," Transportation Research Part B: Methodological, Elsevier, vol. 91(C), pages 466-491.
    7. Chen, Anthony & Subprasom, Kitti, 2007. "Analysis of regulation and policy of private toll roads in a build-operate-transfer scheme under demand uncertainty," Transportation Research Part A: Policy and Practice, Elsevier, vol. 41(6), pages 537-558, July.
    8. Luiz Eduardo Brandao & Eduardo Saraiva, 2008. "The option value of government guarantees in infrastructure projects," Construction Management and Economics, Taylor & Francis Journals, vol. 26(11), pages 1171-1180.
    9. de Palma, André & Lindsey, Robin & Proost, Stef, 2007. "Chapter 1 Investment and the use of tax and toll revenues in the transport sector: The research agenda," Research in Transportation Economics, Elsevier, vol. 19(1), pages 1-26, January.
    10. Tan, Zhijia & Yang, Hai, 2012. "Flexible build-operate-transfer contracts for road franchising under demand uncertainty," Transportation Research Part B: Methodological, Elsevier, vol. 46(10), pages 1419-1439.
    11. Yang, Hai & Meng, Qiang, 2000. "Highway pricing and capacity choice in a road network under a build-operate-transfer scheme," Transportation Research Part A: Policy and Practice, Elsevier, vol. 34(3), pages 207-222, April.
    12. Schmitz, Patrick W., 2015. "Government versus private ownership of public goods: The role of bargaining frictions," Journal of Public Economics, Elsevier, vol. 132(C), pages 23-31.
    13. Xiao, Feng & Yang, Hai & Han, Deren, 2007. "Competition and efficiency of private toll roads," Transportation Research Part B: Methodological, Elsevier, vol. 41(3), pages 292-308, March.
    14. Bing Li & A. Akintoye & P. J. Edwards & C. Hardcastle, 2005. "Critical success factors for PPP/PFI projects in the UK construction industry," Construction Management and Economics, Taylor & Francis Journals, vol. 23(5), pages 459-471.
    15. Feng, Zhuo & Zhang, Shui-Bo & Gao, Ying, 2015. "Modeling the impact of government guarantees on toll charge, road quality and capacity for Build-Operate-Transfer (BOT) road projects," Transportation Research Part A: Policy and Practice, Elsevier, vol. 78(C), pages 54-67.
    16. Zhang, Yiwen & Feng, Zhuo & Zhang, Shuibo, 2018. "The effects of concession period structures on BOT road contracts," Transportation Research Part A: Policy and Practice, Elsevier, vol. 107(C), pages 106-125.
    17. Corchón, Luis C., 2008. "Welfare losses under Cournot competition," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1120-1131, September.
    18. Tan, Zhijia, 2012. "Capacity and toll choice of an add-on toll road under various ownership regimes," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(6), pages 1080-1092.
    19. Yin, Yafeng & Guo, Xiaolei, 2016. "Optimal choice of capacity, toll and government guarantee for build-operate-transfer roads under asymmetric cost informationAuthor-Name: Shi, Shasha," Transportation Research Part B: Methodological, Elsevier, vol. 85(C), pages 56-69.
    20. Timothy C. Irwin, 2007. "Government Guarantees : Allocating and Valuing Risk in Privately Financed Infrastructure Projects," World Bank Publications - Books, The World Bank Group, number 6638.
    21. Zhang, Yiwen & Feng, Zhuo & Zhang, Shuibo & Song, Jinbo, 2018. "The effects of service level on BOT transport project contract," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 118(C), pages 184-206.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhao, Yunpeng & Song, Jinbo & Feng, Zhuo & Jin, Lulu, 2023. "Incentive contracts with demand guarantee in BOT toll road projects," Research in Transportation Economics, Elsevier, vol. 98(C).
    2. Yuan, Jingfeng & Ding, Hongxing & Huang, Zeyuan & Deng, Binchao & Li, Shuai & Huang, Wei, 2021. "Influence of market structures on concession pricing in Public-Private-Partnership utilities with asymmetric information," Utilities Policy, Elsevier, vol. 69(C).
    3. Kangsoo Kim & Jinseog Kim & Hyejin Cho & Donghyung Yook, 2024. "Determining contract conditions in a PPP project among deep uncertainty in future outturn travel demand," Transportation, Springer, vol. 51(3), pages 937-961, June.
    4. Liu, Huimin & Song, Shuang & Hu, Yi & Yan, Xue, 2020. "Monte-Carlo optimization model for dynamic capital structure adjustment in Chinese public-private partnerships under revenue uncertainty," Transportation Research Part A: Policy and Practice, Elsevier, vol. 142(C), pages 115-128.
    5. Huang, Naqun & Lien, Jaimie W. & Zheng, Jie, 2023. "To acquire or compete? Government intervention in transportation under different route structures," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 172(C).
    6. Chen, Jiandong & Yu, Jie & Shen, Zhiyang & Song, Malin & Zhou, Ziqi, 2023. "Debt financing and maintenance expenditure: Theory and evidence on government-operated toll roads in China," Economic Systems, Elsevier, vol. 47(1).
    7. Shi, Shasha & An, Qingxian & Chen, Ke, 2020. "Optimal choice of capacity, toll, and subsidy for build-operate-transfer roads with a paid minimum traffic guarantee," Transportation Research Part A: Policy and Practice, Elsevier, vol. 139(C), pages 228-254.
    8. Yuqun Dong & Yaming Zhuang, 2023. "Research on an Investment Decision Model of Waste Incineration Power under Demand Guarantee Policies," Sustainability, MDPI, vol. 15(15), pages 1-19, July.
    9. Chen, Zhiyuan & Sun, Shaobo & Li, Jianbin & Zhang, Langlang & Fan, Hao, 2022. "Optimal BOT contracts in a two-road transportation network," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 164(C).
    10. Lu, Zhaoyang & Meng, Qiang, 2023. "Effects of asymmetric investment cost information on revenue-compensated build-operate-transfer highway contracts," Transportation Research Part B: Methodological, Elsevier, vol. 172(C), pages 71-92.
    11. Andrew K. Kamenju & Dr. T. Olweny, 2021. "The Nexus Between Internal Investment and Economic Growth in Kenya," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(2), pages 1-2.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhao, Yunpeng & Song, Jinbo & Feng, Zhuo & Jin, Lulu, 2023. "Incentive contracts with demand guarantee in BOT toll road projects," Research in Transportation Economics, Elsevier, vol. 98(C).
    2. Wang, Wei (Walker) & Jin, Xi & Tan, Zhijia & Sun, Huijun & Wu, Jianjun, 2022. "Modeling the effects of government subsidy and regulation on BOT transport project contract design within contractible service quality," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 164(C).
    3. Shi, Shasha & An, Qingxian & Chen, Ke, 2020. "Optimal choice of capacity, toll, and subsidy for build-operate-transfer roads with a paid minimum traffic guarantee," Transportation Research Part A: Policy and Practice, Elsevier, vol. 139(C), pages 228-254.
    4. Meng, Qiang & Lu, Zhaoyang, 2017. "Quantitative analyses of highway franchising under build-operate-transfer scheme: Critical review and future research directions," Transportation Research Part B: Methodological, Elsevier, vol. 102(C), pages 105-123.
    5. Shi, Shasha & Yin, Yafeng & An, Qingxian & Chen, Ke, 2021. "Optimal build-operate-transfer road contracts under information asymmetry and uncertainty," Transportation Research Part B: Methodological, Elsevier, vol. 152(C), pages 65-86.
    6. Feng, Zhuo & Song, Jinbo & Yang, Xiaoxing & Guo, Ran, 2023. "Contractual flexibility, firm effort, and subsidy design: A comparison of PPP project contracts," European Journal of Operational Research, Elsevier, vol. 307(1), pages 484-496.
    7. Hoang-Tung, Nguyen & Viet Hung, Do & Kato, Hironori & Binh, Phan Le, 2021. "Modeling ceiling price for build-operate-transfer road projects in developing countries," Economics of Transportation, Elsevier, vol. 28(C).
    8. Wang, Fan & Xiong, Minghua & Niu, Baozhuang & Zhuo, Xiaopo, 2018. "Impact of government subsidy on BOT contract design: Price, demand, and concession period," Transportation Research Part B: Methodological, Elsevier, vol. 110(C), pages 137-159.
    9. Zhang, Yiwen & Feng, Zhuo & Zhang, Shuibo & Song, Jinbo, 2018. "The effects of service level on BOT transport project contract," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 118(C), pages 184-206.
    10. Chen, Zhiyuan & Ye, Hanrui & Liu, Bingxi & Xue, Weili, 2021. "Analysis of road capacity and franchise price decision delegation in toll road BOT project," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 146(C).
    11. Feng, Zhuo & Zhang, Yiwen & Zhang, Shuibo & Song, Jinbo, 2018. "Contracting and renegotiating with a loss-averse private firm in BOT road projects," Transportation Research Part B: Methodological, Elsevier, vol. 112(C), pages 40-72.
    12. Li, Shuai & Cai, Hubo, 2017. "Government incentive impacts on private investment behaviors under demand uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 101(C), pages 115-129.
    13. Feng, Zhuo & Zhang, Shui-Bo & Gao, Ying, 2015. "Modeling the impact of government guarantees on toll charge, road quality and capacity for Build-Operate-Transfer (BOT) road projects," Transportation Research Part A: Policy and Practice, Elsevier, vol. 78(C), pages 54-67.
    14. Chen, Zhiyuan & Sun, Shaobo & Li, Jianbin & Zhang, Langlang & Fan, Hao, 2022. "Optimal BOT contracts in a two-road transportation network," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 164(C).
    15. Lu, Zhaoyang & Meng, Qiang, 2023. "Effects of asymmetric investment cost information on revenue-compensated build-operate-transfer highway contracts," Transportation Research Part B: Methodological, Elsevier, vol. 172(C), pages 71-92.
    16. Feng, Zhuo & Zhang, Shui-Bo & Gao, Ying & Zhang, Shuai-Jun, 2016. "Subsidizing and pricing private toll roads with noncontractible service quality: A relational contract approach," Transportation Research Part B: Methodological, Elsevier, vol. 91(C), pages 466-491.
    17. Tan, Zhijia & Yang, Hai & Tan, Wei & Li, Zhichun, 2016. "Pareto-improving transportation network design and ownership regimes," Transportation Research Part B: Methodological, Elsevier, vol. 91(C), pages 292-309.
    18. Li, Shuai & Cai, Jiannan & Feng, Zhuo & Xu, Yifang & Cai, Hubo, 2019. "Government contracting with monopoly in infrastructure provision: Regulation or deregulation?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 122(C), pages 506-523.
    19. Kangsoo Kim & Jinseog Kim & Hyejin Cho & Donghyung Yook, 2024. "Determining contract conditions in a PPP project among deep uncertainty in future outturn travel demand," Transportation, Springer, vol. 51(3), pages 937-961, June.
    20. Zhang, Yiwen & Feng, Zhuo & Zhang, Shuibo, 2018. "The effects of concession period structures on BOT road contracts," Transportation Research Part A: Policy and Practice, Elsevier, vol. 107(C), pages 106-125.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:transa:v:117:y:2018:i:c:p:158-175. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/547/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.