Incentive Mechanism and Value-Added in PPP Projects Considering Financial Institutions’ Early Intervention

Abstract

In public-private partnership (PPP) projects, as the largest funds provider, financial institutions only supervise the cash flow in the project’s implementation stage. Since financial institutions are not involved in the project’s preliminary planning stage, they have inadequate risk management to projects, leading to adverse effects on the following project’s implementation. This paper proposes that financial institutions intervene in PPP projects early, use their resources to make reasonable plans for the project, enhance the identification and control of project risks, and improve the project profitability and successful implementation possibility. Based on the transaction cost theory, this paper constructs the incentive mechanism and value-added Stackelberg game model of PPP projects under the scenario that financial institutions intervene early. Considering financial institutions intervene in PPP early, the government will reduce planning costs and private investors will save financing costs. The results show that financial institutions’ early intervention in PPP projects can enhance the government’s efforts, private investors’ efforts, the government’s incentive intensity, and also the project’s value-added level. Compared with financial institutions that do not intervene in advance, the entire model can achieve Pareto improvement. This paper is conducive to expanding the application of transaction cost theory in PPP projects. In addition, it can also be conducive to improving the status quo that financial institutions cannot participate in PPP projects in the early stage and promoting the successful implementation of PPP projects.