Research On The Private Sector’ Renegotiation Of Sewage Treatment PPP Project Under Cost And Demand Risks:An Evolutionary Game Approach

The construction and development of sewage treatment project is an important method of water environment governance,which occupies an important position in the field of public infrastructure in China.However,due to insufficient investment in the construction of sewage treatment plants and lack of professional management knowledge,water demand and sewage treatment capacity is difficult to synchronize,which makes water system and water environment planning more urgent.Given the massive demand for new water infrastructure and lack of capital and professional expertise,public-private partnerships have become one of the most popular and important governance structures for sewage treatment projects.It is a means of establishing a long-term partnership between the public and private sectors.The wide application of PPP model in sewage treatment has greatly improved the efficiency of water environment treatment.Besides the above benefits of this delivery method,one of the primary pitfalls is the high occurrence and inevitability of renegotiation.Renegotiation has been recognized as the Achilles’ heel of concessions.Renegotiations increase transaction costs,which may result in cooperation dilemma,further early termination of a PPP project,which has raised doubts on the viability of PPPs.As a result,renegotiations in sewage treatment PPP projects must be regulated to reduce the incidence.This paper summarizes the current situation of sewage treatment industry in China and points out that construction costs and demand changes are important factors leading to renegotiation during contract execution.In a sewage treatment PPP project,the renegotiation of the private sector in the construction stage usually occurs when the actual construction costs are higher than expected,and the renegotiation of the private sector in the operation stage usually occurs when the demand level of sewage treatment is lower than expected.In this case,the private sector whose interests have been damaged may obtain a certain amount of compensation by initiating renegotiation to modify the original contract terms.The existing studies have proposed a causal relationship between costs and demand risks and renegotiation of sewage treatment PPP projects.Cost overruns and demand decrease do not necessarily lead to renegotiations,and renegotiations occur only when cost overruns or demand decrease have reached a certain level.Then,how to quantify these thresholds can be the core issue of the PPP renegotiation framework.In order to fill this gap,this paper introduces construction costs and sewage treatment demand level as the quantitative financial indicators,and applies the evolutionary game to the renegotiation framework of PPP projects.The evolutionary game models are established respectively to explore the renegotiation behavior of the private sector in sewage treatment PPP projects.This paper studies the impact of environmental change on the renegotiation of sewage treatment PPP projects caused by the fluctuation of construction costs and the fluctuation of sewage treatment demand level.The findings put forward the private sector’renegotiation and "no renegotiation" thresholds,reveal the non-linear relationship between the private sector’ renegotiation behavior and the fluctuation of construction costs and sewage treatment demand level,which improve the PPP renegotiation framework.This study provides a decision reference for the governance of PPP project renegotiation and improves the success rate of the project.