Research On Rigid Contract And Flexible Contract Of PPP Road Project

Transportation projects provide a solid foundation for the realization of China’s two Centenary Goals.In recent years,with the rapid development of the country’s economic development,road and railway construction projects are gradually increasing.As it can effectively improve project quality and operation efficiency,and reduce the government’s financial pressure,PPP mode has become an important tool for private sector to participate in the public infrastructure projects.However,due to large amount of project funds and the unforeseen demand uncertainty,the PPP projects have often encountered difficulties during the construction and operation period.Therefore,reasonable selection and design of ex-ante contracts is necessary to promote the development of PPP road projects.The contract selection and design of PPP road project should be based on the trade-off between the benefits and risks.Based on the Incomplete Contract Theory,this paper discusses the design and selection of the rigid contract and flexible contract for PPP road project.First,we give a literature review to summarize the current research on PPP contract design and the Incomplete Contract Theory.Then,we introduce the noncontactable investment level and employ the Stackelberg model to build the ex-ante decision-making model of rigid and flexible contracts between government and the private sector to obtain the optimal decision of both parties in each stage of the project.At the same time,the key factors in the model are analyzed and the influence of different factors on the project results is discussed.Next,on the basis of the optimal decision model,this study compares the rigid contract and the flexible contract in different situations.Finally,a numerical example is employed to demonstrate and verify two models.The conclusions show that: appropriate original toll design can realize the incentive of private sector’s investment and achieve the goal of maximizing the profit of social welfare and private sector.In flexible contract design,the renegotiation trigger mechanism is related to the actual demand,and plays a key role in balancing the risk of demand uncertainty and hold-up.Through the comparative analysis of the contract types,the following conclusions can be obtained: when the impact of unit investment on demand is large,flexible contracts can achieve Pareto improvement of social welfare and private sector’s profit;when the impact of unit investment on demand is low,the interests of one party will always be damaged,regardless of which contract is chosen.To sum up,this study provides support for the fair and effective decision making of PPP contract selection and design by comprehensively considering the behavior of both parties,project characteristics and external environment,and provides suggestions for the government to determine the ex-ante contract.