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

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  • 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.

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  • 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
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    References listed on IDEAS

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    Cited by:

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    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.

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