Build-Operate-Transfer: A Concrete Study of Public-Private Partnerships

This dissertation focuses on one of the most used Public-Private Partnership (PPP) contracts: Build-Operate-Transfer (BOT) contract to study the theoretical problems haven’t been well addressed in the contract design. Chapter one focuses on the applicability of a general recognized method in PPP contract design. The conventional goal of contract design is to find the best possible arrangement between a principal and an agent from the principal's point of view. While this goal readily permits the principal to modify her options of an instrument, it treats her decision path as a black box. For principals who make decisions based on complementary collaborations among departments, proper institutional arrangements to assist better decision-making are of special importance. Departmental collaborations may create challenges for the proper application of otherwise sound approaches to find the optimal contract, such as, the Revelation Principle, which requires the agents' truthful and comprehensive reporting of their private information. While presuming that the principal has control over the entire mediation plan, this study finds that, in certain situations, cooperative principals with restricted power over the entire mediation plan should be cautious about making decisions relying only on the relevant information and the optimality of the coordinated results. It also shows that the full report of the agents' private information is key to a valid application of the revelation principle, regardless of the report's decision-relevance. Even with a full report, an entire mediation plan made by coordinated principals with restricted control may not achieve the best outcome, because they treat each other's decisions, while complementary, as sunk. Chapter One ends with regulatory suggestions concerning institutional design in institutions with multi-level cooperation. Chapter 2 uses BOT contract to study how the government efficiently resorts to the private sector firm's assistance for public goods' provision. BOT contract stipulation is a two-dimensional screening process for both the constructional and operational regulatory decisions. The optimal BOT contract extracts the private contractor's relative operational efficiency to compensate his upfront construction cost investment. Different from the literature, if the contractor only has one-dimensional high efficiency, "no distortion at top" for neither complementary decision is guaranteed. The prior distribution over types guides the decision of rationing out the least efficient type to reduce rent paying. A newly proposed Lagrangian decomposition method in combinatorial optimization studies is used to justify the optimal screening process. The government's utility is non-separable over the construction and operation decisions, hence the sovereign decision process potentially incurs a tradeoff between decisions independence and decision efficiency. Chapter 3 studies the liability allocation between partners when a negative shock hits in a Public-Private Partnership. In a PPP contract, a private sector firm trades its upfront investment and cost for a time-constrained de facto monopoly of the public good; while the government trades off the regulation intensity on the monopoly power for the gain of the public service provision. Given the presence of dual tradeoffs, the liability concern in a Public-Private Partnership and that in traditional partnerships differ. First, the government makes no initial investment but has the final ownership of the project. Such ownership empowers the government the rights to claim the residual value of the public project as a creditor. Second, when a negative shock hits, the private sector’s financial ability and its advantage on construction technology of the project provision prevents the private contractor from taking the full responsibility. This paper focuses on how to design PPP contracts that incentivize a high quality provision of the public good, concerning the randomness of the project’s revenue stream and the liability allocations when an unfavorable event happens. Unlike in a traditional partnership, the loss of the private sector in a PPP is not up to the limit of the investment they put in the public project but up to the limit of the gain they get from the public project’s revenue.Doctor of Philosoph