Early Termination Mechanism of Public–Private Partnership Transportation Projects with Government Guarantee

Abstract

Governments typically provide some form of guarantee to ensure the financial viability of public–private partnership (PPP) projects confronted with traffic demand shortage. Although a number of studies have analyzed the problems associated with the optimal level of guarantee and the pricing mechanism of early termination initiated by private companies or governments, most have ignored the mechanism of early termination of PPP projects with a government guarantee. This paper proposes a government decision-making framework that enables the evaluation of optimal circumstances for the early termination of PPP transportation projects where the actual revenue falls below the minimum revenue guaranteed by the government. In particular, this study analyzes how the government can determine ex-ante whether and when to grant a private company the right to early termination as well as determine ex-post whether to voluntarily terminate the project by considering the tradeoff between social benefit and cost resulting from such a termination. This study sheds light on how to develop an early termination mechanism that can be used in conjunction with the government guarantee to deal with demand risk in PPP transportation projects.