Achieving public agency goals in public-private partnerships using innovative payment mechanisms

Public-Private Partnership (PPP), as an innovative project delivery method, is increasingly used due to its advantages in relieving the capital pressures on project development and involving more life-cycle considerations in project early planning stage. Under a PPP concession contract, the achievement of public agencies' goals can be facilitated through linking the contractor's compensation, referred to as payment mechanism, to the realization of stated project performance and achievement of government goals. Payment mechanism lies at the heart of PPP contracts. A good design of the payment mechanism should consider public agencies' goals in the project, allocate risks appropriately to stakeholders, and assure satisfactory performance through providing reasonable compensation to the private developer. While the procedures and recommendations for the design of payment mechanisms have been widely discussed in publications, guidance on how to link the achievement of project objectives with the concessionaire's payment is relatively scarce. As such, the concessionaire would be getting compensation without being subject to scrutiny over the achievement of project objectives. In this case, the public agency's goals (e.g.improve roadway safety and availability) may not be fully achieved through PPP. Additionally, the design of payment mechanisms in the existing PPP projects heavily relies on the subjective judgment of decision makers, which is hard to guarantee the trustability of the payment mechanism. To deal with the these deficiencies as well as to provide a systematic understanding of the design of payment mechanism, this study undertook an in depth literature review on the design of payment mechanisms, conducted a content analysis of several guidance documents regarding payment design from different countries, analyzed the payment-related contractual terms of more than 89 PPP projects and conducted questionnaire surveys to PPP experts from both academia and industry. Based on such works, a practical explanatory framework was developed to assist public owners in designing proper payment mechanisms for transport PPPs. The framework helps in (1) identifying the key considerations, (2) prioritizing project goals, and (3) deciding proper payment schemes and payment type(s). This study further proposed a Stackelberg game theory-based model to determine the optimal amount of payments assigned to each goal. The model searches for solutions that maximize the overall project performance for the sake of social welfare while simultaneously maximize the return for the sake of private investment. A case study based on a real PPP project was discussed to validate the effectiveness of the proposed model. Public agencies would use the framework as a reference to revisit and improve their design of payment mechanisms for their PPP project. Also, the solution provided by the model revealed that the optimal payment mechanism structure could be reached such that it would satisfy the owner's requirements for the overall project performance while optimizing the project total payments to the contractor.