Design of a bankable and resilient financial arrangement for PPP projects using game theory with multi-agent simulation

Public private partnership (PPP) approach is an innovative procurement method to alleviate the shortage of infrastructure development. The financial arrangement, especially the debt arrangement, determines the success of a PPP project. Considering the real problems encountered during the financial arrangement period and the worse situation for the debt arrangement of PPP projects after the credit crisis from 2008, this dissertation attempts to help the private sector properly manage the financial arrangement risk of PPP projects, i.e., the failure of achieving a financial close, from the perspectives of bankability and crisis-resilience. For the above purpose, this dissertation provides a methodological framework for the financial arrangement risk management of PPP projects. Several models to explore the critical bankability criteria and simulate major interactions between stakeholders during the financial arrangement and loan application process are developed. A Fuzzy Analytic Hierarchy Process (AHP) - based Bankability Criteria Ranking approach is first proposed to identify the critical qualitative bankability evaluation criteria of PPP projects from the bank’s perspective. After soliciting experts’ opinions of the importance of 41 bankability criteria through a structured questionnaire survey, the top twenty most important criteria from the bank’s perspective are identified. The findings of this study also reveal the inconsistent perceptions on the importance weights of bankability criteria among different stakeholders and areas through a comparison of six sets of importance weights of bankability criteria from different stakeholders and areas. Since the bank has become the main source of debt financing after the credit cri sis and economic recession from 2008, a Loan Arrangement Signaling Game model is subsequently proposed to simulate the loan application and approval process between the private sector and the bank. The model allows a more realistic representation of the practice by incorporating the bank’s internal credit rating system, credit scoring process and the decision - making heuristics of both the private sector and the bank. With this model, a series of simulations from different perspectives is conducted. The findings reveal that different perceptions on the importance weights of the bankability criteria between the private sector and the bank can worsen debt terms. Moreover, different credit assessments can lead to the rejection of a loan application. The findings also indicate that the private sector can improve the bankability of a project through exploring more available credit support approaches (CSAs) and the proper judgment of the difference in the weighted credit score between the private sector and the bank according to different circumstances. Considering the immaturity of financial insurance market and the increasing requirements of the financial insurance products from the bank, a Double Auction Game model is then proposed to simulate the trade of financial insurance products between the private sector and the insurer and analyze the pricing of financial insurance products. Through theoretical analysis, the model first reveals that the bank’s requirements for financial insurance not only increase the occurrence of the trade but also increase the premium. In order to help the private sector identify the bank’s requirements and concurrently decrease the premium, a new risk identification and mitigation process is recommended. The model also reveals that the flourishing of the financial insurance market can eventually decrease the premium of financial insurance products. This can be spurred through establishing a good collection of financial insurance data on PPP projects which have been accumulated over the decades. All stakeholders take debt terms very seriously since debt terms greatly affect the net present value (NPV ) and internal rate of return ( IRR ) of PPP projects. However, the negotiation of debt terms is time - consuming and expensive. A debt terms’ bargaining model is proposed to simulate the negotiation process between the bank and private sector u sing bargaining game theory with time - dependent negotiation tactics coupled with a learning - based approach. With this model and a developed multi - agent system (MAS) program, a series of simulations has been conducted. The findings first reveal that the effect of the superiority of the first offerer and the negotiation tactics are very obvious. The use of the negotiation tactics and learning ability can quickly finalize the negotiation, which improves the solution to the negotiation inefficiency problem. The findings subsequently indicate that the sponsor can obtain a better payoff with a higher bargaining power. The findings finally point out that the sponsor can adopt the strategy of a short response time to generally achieve a better outcome when his bargaining power is relatively high. However, there is a trade - off between the payoff advantage and a faster negotiation finalization when his bargaining power is relatively low. This implies that the private sector needs to sacrifice some payoff to successfully conclude the negotiations when his bargaining power is relatively low, especially in a tight financial close deadline. In order to captures the oscillatory behavior of relevant stakeholders in the interactions between them and their adaptions to environment conditions, a MAS program, which incorporates the proposed models in a single environment and adopts the resilience concept, is developed to simulate the whole complex and dynamic financial arrangement process. A real case study is conducted to investigate the response capability of a financial arrangement under external disruptions. The findings indicate that bankability is a ‘state’ that depends on the financial structure, financial arrangements and external environment. Under serious external disruptions, the private sector can increase the opportunity to achieve a financial close through exploring more available CSAs. More available CSAs can also decrease the duration of a financial close and increase the recoverability of a financial arrangement under external disruptions. The findings further reveal that the private sector’s proper judgment on the difference in weighted credit score also greatly affects the success of a financial close and equity internal rate of return (EIRR) of a project. To achieve the optimal outcome, the private sector needs to make a balance between the probability of a successful financial close and the cost of CSAs.