The renegotiation on PPP contracts and subsidy efficiency

Abstract

Since 2014, PPP has been developing rapidly in China and widely used in infrastructure construction such as transport, energy, sewage. The characteristics of long time, large investment and high complexity of PPP projects lead to the high incidence of renegotiation. However, experience at home and abroad indicates that most renegotiations are caused by the speculation of firms, in order to obtain subsidies to avoid taking risks and thus bring social welfare losses. Therefore, how to set reasonable renegotiation subsidy to improve project efficiency is an urgent problem in practice. This paper examines the impact of renegotiation subsidies on moral hazard and project efficiency. The problem of moral hazard refers to the fact that firms choose to make low level of efforts in advance (before risks occur) aiming at private profits. The paper firstly analyzes the intrinsic influence mechanism of renegotiation subsidy on the efficiency of PPP project by building a game model based on the incomplete contract theory and game theory, and then discusses the key factors affecting project efficiency, and finally puts forward corresponding policy recommendations. The research results show that: Moral hazard makes risk events more likely to occur, but enterprises can avoid bearing all the losses with the support of renegotiation subsidies, thereby increasing the incidence of moral hazard. Therefore, over subsidy will reduce the ex-ante efficiency, even if the ex-post efficiency still can be achieved. Controlling the renegotiation subsidy to a certain extent can avoid the occurrence of moral hazard, and achieve ex-post efficacy and financial efficiency at the same time. Optimizing policy variables such as private profit B, opportunity cost of re-tendering τ and legitimate profit of firms R-I can lower the requirement of government's negotiating power, making it easier to control the subsidy to the above scope. The research results can provide government with reference about renegotiation in decision making and provide theoretical support for the practice of PPP renegotiation.