Optimal equity structure of PPP projects when private-sector shareholders’ “investor-contractor” dual roles is considered

More often than not, in typical public-private partnership (PPP) projects, the construction contractor (CC) and operating contractor (OC) serve as shareholders simultaneously. CC and OC shareholders have different payback periods and paths, which may result in opportunistic risk. Therefore, an optimal equity structure is required to lower this risk. Based on cooperative game theory, a game model was developed to determine the optimal equity structure between CC and OC. The findings indicate that when the relative complexity of PPP project construction is higher than that of operation, CC should be given a higher equity ratio. Conversely, when the relative complexity of PPP project operation is higher, OC should be given a higher equity ratio. When the construction and operation of the project are equally complex, allocating equity ratios according to market value can reduce transaction costs, based on transaction cost theory. The findings also suggest that increasing CC’s equity ratio can effectively motivate them to better complete the construction work in the long run when the benefits of construction quality are significant. As for OC, increasing bonuses is also an effective incentive method. These findings provide insights into the design of the equity structure of PPP projects to enhance their success.