Minimum revenue guarantee and toll revenue cap optimization for PPP highways: Pareto optimal state approach

Wang, Yuanqing; Li, Zihua; Gao, Yanan

doi:10.3846/bjrbe.2015.46

Cited by 7 publications

(2 citation statements)

References 16 publications

(12 reference statements)

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“…An optimal level of the government guaranteed was also identified by Sun and Zhang (2014). Based on Monte Carlo simulation and scatter search algorithm, Wang et al. (2015) determined the specific levels of government guarantee and revenue cap.…”

Section: Existing Models In Government Guarantee and Revenue Cap Rese...mentioning

confidence: 99%

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Determination of government guarantee and revenue cap in public–private partnership contracts

Jin

Liu

et al. 2021

ECAM

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PurposeConsidering there is a lack of research in determining the optimal levels of government guarantee and revenue cap, the objective of this research is to determine their optimal levels to achieve a reasonable financial risk allocation between governments and private investors while avoiding overly lucrative conditions for private investors.Design/methodology/approachExpanded net present value (NPV) analysis and bargaining game theory are employed to construct the core of the determination process. The risk gap between governments and private investors is assessed via an expanded NPV analysis to see if the financial risk has been shared reasonably, based on which the range of the government guarantee is decided. A bargaining model is then created to help locate the optimal level of the government guarantee. Finally, a revenue cap, often combined with the government guarantee in public–private partnership (PPP) agreements, will be determined if overly lucrative conditions for private investors are observed or governments suffer a risk spillover.FindingsReferring to a real PPP project in Australia, Project BA is created to validate the applicability of the proposed determination process. The outcome shows that the proposed determination process in this paper is capable of determining the optimal levels of government guarantee and revenue cap. The government preferences towards risk allocation will influence the values of the optimal levels. Governments may also consider to alleviate the control over investors' net profits to mobilise private investors into PPP projects.Research limitations/implicationsThere is a potential possibility that the revenue cap fails to control the financial risk for governments or the overly lucrative condition for private investors. In other words, even though the revenue cap is set at the minimal level, the financial risk for governments still beyond their tolerance range or the overly lucrative condition for private investors still occurs. Future research may focus on other financial protective schemes which help to better control the financial risks for governments and profits for private investors.Originality/valueGovernment guarantees are frequently used as an investment incentive to reduce the probabilities of suffering loss for private investors. Nevertheless, the financial risks for governments may increase after providing guarantees and, as a result, revenue cap is required by governments to avoid placing themselves in an unprotected situation. By recognising the importance of the two contractual parameters, many scholars dig into their option values. However, there are very rare research works focussing on the method of determining the specific levels of government guarantee and revenue cap. To overcome the limitations of existing models and enrich the methodology for government guarantee and revenue cap determination, this paper contributes to the body of knowledge by developing a government guarantee and revenue cap determination process which contributes to a reasonable allocation of financial risks between governments and private investors.

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Section: Existing Models In Government Guarantee and Revenue Cap Rese...mentioning

confidence: 99%

“…Government guarantee is one of the core contractual parameters provided to mitigate the revenue risks for private investors (Marzouk and Ali, 2018). Wang et al. (2015) also claimed that minimum revenue guarantee and revenue cap are effective measures for revenue risk-sharing between governments and private investors.…”

Section: Introductionmentioning

confidence: 99%