Early-Termination Compensation in Public–Private Partnership Projects

Abstract

Public–private partnerships (PPPs) have been widely applied around the world in the provision of public works and services. Although a large number of PPP projects in different sectors have been successfully developed with increased value for money to governmental departments and the general public, concessions of many other projects in both developed and developing countries have been terminated before the originally scheduled date because of various unforeseen risks. To address the key issue of compensation to the concessionaire in such an early-terminated concession, this paper develops a compensation estimation framework and a corresponding mathematical model through a market value approach. A compensation model is developed using the discounted cash flow technique, which integrates multiple input and output variables and probabilistic techniques, such as regression analysis, maximum likelihood analysis, and Monte Carlo simulation, to analyze and tackle the uncertainties of social-economic variables and project performance variables. An example is provided to illustrate the applicability of this compensation estimation model; it shows that this model can take advantage of historical data from early-terminated projects and improve accuracy in measuring uncertainties associated with social-economic variables and project performance variables. This compensation model provides a fair compensation system to safeguard the benefits of both the concessionaire and the host government of the PPP project. It is expected that this model will assist the host government and concessionaire in effectively solving the compensation issue in future early-terminated PPP projects in a fair way.