Research on Risk Sharing of PPP Project Based on Game Theory

Transcription

1 doi: /ijmser Research on Risk Sharing of PPP Project Based on Game Theory Lai Yifei *1, Fahad Alam 2 Economics and Management School, Wuhan University, Wuhan , Hubei Province, China *1 lyf37319@163.com; 2 sfahadalam0955@gmail.com Abstract PPP model is an important way to provide public facilities or services, which is conducive to alleviating the financial pressure of the public sector, broadening the investment channels of the private sector and opening up a new way for China's private investment to participate in public infrastructure. But the problem of the risk sharing has been focused on the failure rate of the model. Based on the elaboration of PPP concept, risk classification, risk sharing principle and framework, this paper uses the game model to determine the optimal risk sharing ratio between the public sector and private sector. Keywords Public - Private Partnership (PPP); Risk - Sharing; Game Theory Introduction In most countries after World War II, the government has been the main provider of infrastructure projects. The PPP model was first implemented in UK in In subsequent practice, PPP was considered an effective way to promote the development of national infrastructure projects. In China, investing heavily in public infrastructure construction every year, according to World Bank studies, shows that developing countries invest 4% of their gross domestic product (GDP) in public infrastructure every year, according to China's gross domestic product in trillion Yuan to calculate, China's annual investment in public infrastructure to more than 2.96 trillion Yuan, and with China's implementation of the "one way along" and a series of strategic measures to make China's infrastructure investment demand is growing, This puts a lot of pressure on the state's finances, and how to solve the financial crisis becomes a major problem, which forces us to find new ways of project cooperation, and the emergence of PPP cooperation model makes the solution possible. At present, the local government promote the enthusiasm of the PPP model, was placed a lot of expectations. The promotion use of government and social capital cooperation (PPP) model is also an important measure to implement the spirit of the Third Plenary Session of the Eighteenth Central Committee of the Eighth Plenary Session on the "Allowing Social Capital to Participate in Urban Infrastructure Investment and Operation through Franchising" The construction of modern governance system and the modernization of governance capacity, the transformation of the institutional mechanism of modern financial system. Since 2014, with the National Ministry of Finance, the National Development and Reform Commission on the promulgation of PPP policy and the continuous introduction of PPP projects in various provinces and cities, a large number of PPP projects "landing" implementation. Preliminary statistics, the current provinces have announced the total investment in PPP projects in 2015 will be nearly one trillion Yuan. In the appearance of growing demand for public services, government departments are increasingly turning to the market due to lack of funds and lack of long-term and effective management, turning to the private sector to provide services, and the application of the PPP model in the world Trend, but the PPP model is also a doubleedged sword. It can solve the government development of public utilities lack of funds bottlenecks, through the market mechanism can be more flexible operation, the optimal allocation of social resources, compared with the traditional model, the model of PPP is regarded as a more social-oriented infrastructure construction; But if applied improperly, will also cause damage to the Government, the public and the private sector, leading to a public and 54

2 International Journal of Management Science and Engineering Research, Volume 4 Issue 2, private situation. How to protect the public nature of public goods, but also to enable enterprises to improve management through improved management, is a worthy subject. Studies have shown that the key to the success of using PPP models to build infrastructure projects is a reasonable risk-sharing between government and private capital. The main objective of this paper is to study the PPP model as the research object. On the basis of elaborating the basic concept and related content of PPP risk sharing, this paper focuses on using game theory to construct the optimal risk sharing ratio of PPP project public sector and private sector. Overview of PPP Risk Sharing PPP Concepts and Features PPP (Public-Private Partnership), the government and social capital cooperation, is a public infrastructure in a project mode of operation. In this mode, private enterprises, private capital and government cooperation are encouraged to participate in the construction of public infrastructure. The basic characteristic of the PPP model is that the government shares investment income with the private sector, sharing investment risks and social responsibility. Under the guidance and supervision of relevant policies in China, the government will provide some financial support to the PPP project, while introducing private capital and specialized management and services into the infrastructure field. To reduce the burden on the government, to lift the bottleneck of insufficient funds, give full play to the role of public funds leverage. The public sector has ownership of the project; the private sector has the right to operate. Public-private partnerships are efficiency-oriented, and the private sector is involved in the construction of the entire project, which encourages the private sector to consider the project's life cycle. The biggest feature of the PPP project is that its financing approach can achieve risk management optimization and distribution, through a reasonable risk-sharing to achieve higher efficiency. Reasonable risk sharing can play the advantages of the public sector and the private sector, more focused on their own functions, making the whole project to achieve optimal risk management. PPP project investment, investment recovery period is long, dynamic. Cost reduction. PPP mode uses the form of tender to choose private sector, low cost, high profit is the characteristics of the private sector. The PPP model encourages the private sector to reduce costs through innovative technology, flexible approaches and efficient risk management. To obtain alternative income. Often infrastructure projects have strong external economic benefits, such as the construction of urban rail transit will lead to the increase in the value of land along the area. PPP Risk and Classification Based on the project life cycle theory, the risk is divided into pre-risk, construction period risk, operation period risk and risk of the whole life cycle, and constructs the corresponding risk classification, see Table 1. TABLE 1 RISK CLASSIFICATION OF PPP PROJECT Project worker Life cycle Preparation in advance Risk factor Delays in project approval Political decisionmaking error Financing risk Risk content The project approval process is moreover complicated to take too long and cost too high The government decision-making process is not standardized, inadequate preparation and so on, leading to project decision-making errors Financing risks of financial institutions and risks of item company investment capital 55

3 Construction period Operation period Design change Project completion postponed Project not up to standard Construction cost increase Supporting infrastructure risk Technology risk Operating cost overruns Labor dispute Operation change Insufficient income Market demand change Product delivery interruption Difficulty in collecting fees Uniqueness of the project Project risk from design change during project construction The risk of failure to complete the project within the specified period The project has been up to standard after completion During the construction of the project, the cost of item company construction has increased due to market and other factors Risks associated with front project infrastructure New technology has emerging in the market The cost of the project exceeds the budget and brings risks to the item company Item company risk Risks based from changes in operations during the operation of the project The project operating income cannot be recovered or reached a default profit Risks based from changes in market demand due to macroeconomic factors Supply disruption risk Charges are difficult in operating projects Government or investors build or rebuild other projects to bring commercial competition risks to the project Total life cycle Tax adjustment Government credit risk Regulatory system is imperfect Legal change risk Contract risk Inflation risk Interest rate Force Majeure Risk In the process of Taxation, the government risks the adjustment of the tax rate The policy fails to fulfill its contractual obligations, and it does harm to the project The government is lax in supervision The change of the law band harm to the normal construction and operation of the project Contract defects Because of inflation, the actual cost of the bank increases and the income The uncertainty of market interest rate changes causes the loss of commercial banks A natural disaster or accident, war, etc PPP Risk Sharing Concept and Principles Risks arise with the implementation of the project, and risk sharing is progressively improved with the depth of risk management research. Project risk sharing is in the project implementation process, the project participants in what way and proportion to take the risk of a management activities. Risk sharing is a broad concept, which includes the following aspects: First, identify the types of project risks, the project at different stages of implementation will have different risks, which, risk sharing research needs to be able to clearly identify the risk Type, for the specific risk to find the right to bear; the second is a clear project risk sharing of the main, that is, the project has a participant or the relevant interests of the distribution, they share the interests of the corresponding risk; The risk of sharing the need for its classification, for different subjects to delineate the different risks; Fourth, to determine the risk-sharing method, that is, how to do so, the risk of sharing the risk of the project, Project managers to rationally allocate the project risk, to build a clear risk-sharing framework. The basic principles of risk sharing are as follows: 1) Risk Sharing and Control of the Principle of Symmetry Risk control refers to the ability of multiple parties to a PPP project to reasonably manage risk through risk identification, judgment, control and management. Risk sharing and control of the principle of symmetry, will choose to assign the risk to such a greater risk control of the party. Because the participants who choose the control advantage of risk can not only reduce the probability of risk, avoid unnecessary losses, but also help to rationally mobilize the resources of all parties, so as to make the risk sharing of the whole PPP project more rationalized. 56

4 International Journal of Management Science and Engineering Research, Volume 4 Issue 2, ) Risk Sharing and Income to Match the Principle In the negotiation of the PPP project risk, multiple parties of the PPP project generally require compensation that is matched with the risk of their own commitment as compensation for the risk of the participant. Because of the benefits, multiple participants of the PPP project will risk the risk of the project according to their own technological advantages and risk preferences. Each participant is willing to take the initiative or passively to take control and gain greater returns for himself and the degree of competition willingness of each participant is significantly reduced and is not willing to take risks for the risk factors beyond the control of the participants themselves. As a result, we can choose to adopt a more secure way than to anticipate the risk of sharing PPP projects. 3) The Principle of Risk Sharing Dynamic The risk sharing system of the PPP project is an open system for both public and private, and both public and private are fair competition. The system factor in the risk sharing mechanism is constantly changing. At the same time, because the general PPP project construction period is relatively long, the internal and external environment is in constant change, the potential risk factors may directly affect the stability of the PPP project risk sharing framework. Therefore, we need to continuously carry out risk identification, assessment and sharing of work, so that the risk-sharing mechanism more flexible, to help determine the new situation under the public and private the most reasonable risk-sharing ratio. 4) The Ceiling of The Risk In the entire life cycle of the PPP project, it cannot be anticipated about the occurrence of all risk factors, and the event of an unexpected risk, the threat of these risks is incalculable and that a participant may not have a separate commitment Ability, and then it must be followed the risk ceiling principle. Risk sharing is to achieve the rationality of PPP project risk sharing, if you choose to allow one of the participants to bear too much risk, serious even make the whole project is facing failure. PPP Risk Sharing Framework Initial Risk Allocation The initial risk allocation is at the stage of feasibility study of the project. The risk of the project to be implemented is identified by the public sector in combination with the local economic development, and the risks in the project are determined. The public sector initially determines, based on the results of the risk analysis, which risks are within the control of the public sector and the private sector, which are outside the risk control of both parties. The risks to both sides of the control are shared by both parties and are detailed at the next stage of the negotiations. The public sector has the most control, the risk is that the public sector needs to retain, the remaining risk will need to be transferred to the private sector and thus, the initial risk distribution is over. Negotiation Distribution The private sector evaluates the results of the initial risk allocation and determines whether there is control over the risks to which the public sector transfers it. If the private sector assessment determines the control of the risks transferred to it, the corresponding risk management is carried out; conversely, the risk analysis phase is returned to negotiate. Negotiate the remaining risk parties, take the overall benefit of the project as the starting point and consider the parties to deal with the risk of attitude and the resources, and then the distribution. At this point most of the hazard is the risk of both sides of the control, so the result is mainly shared. Risk Tracking and Redistribution When the public sector and the private sector sign the contract, the risk allocation of the project enters the risk tracking and redistribution phase, and the main task is to track whether the risk of distribution has been unexpectedly or unrecognized, And then the risk of redistribution. The risk factors faced by PPP project operation are extremely complex and reasonable risk sharing is the 57

5 prerequisite for guaranteeing the smooth operation of PPP mode. The premise of reasonable sharing is to identify the participants in the risk-sharing. The risk of the change of the project, the risk of the law change, the risk of inflation, the risk of the contract, the interest rate of the contract, the risk of the contract, the risk of the tax Risk, foreign exchange risk and force majeure risk are shared by multi-party, which are the main risk type of risksharing. Only to identify and measure the risk of PPP projects, just use PPP this weapon, to follow the general rules of large-scale project construction, the project risk between the participants in a reasonable and fair share. A Game - based PPP Risk Sharing Model Construction of Risk Sharing Game Model In order to achieve the overall optimal effect of PPP project risk sharing, the public sector needs to consider the social and economic benefits of the project in a holistic manner. The above analysis can be used to understand that through the game mathematical model, Nash equilibrium, in this equilibrium solution, making the two sides is satisfied with the results of risk sharing. For a multi-stakeholder risk, this paper conducts mathematical simulations on public sector and private sector risk sharing, see Table 2. TABLE 2 GAME MODEL OF RISK SHARING BETWEEN PUBLIC SECTOR AND PRIVATE SECTOR Private sector Strategy a1 a2 Public sector a1 (-,-) (( - ),0) a2 (0,( - ) ) (0,0) Solution of Risk Sharing Game Model Since the game faces the same kind of risk, all = =. To make the Nash equilibrium result depends on = (i=1,2) which appeared in the following three cases: If - >0(i=1,2)there are two Nash equilibrium solutions in the model, which are solutions 1: (assume, do not assume) and solution 2: bear). But the purpose of the game is to make both sides satisfied, so we should choose the - (i=1,2)in the large value of the party to take risks. If - >0 and - <0, this time, the game mathematical model has only one Nash equilibrium, is (assume, does not bear), in this case, the satisfaction of the public sector is positive, whereas the private sector's satisfaction is negative. The private sector is reluctant to assume these risk factors, so the public sector is the only stakeholder in both game play mathematical models. If - <0,and - <0, (bear, no commitment) is the only Nash equilibrium result of the game mathematical model, this time, the public sector satisfaction Is negative, and private sector satisfaction is also negative, and if risk factors are taken, both the public and private sectors will bear the loss, so they reject such risks. It is known from the game mathematical model that the risk factor should be taken into account if the risk factor of the public sector is large and the risk should be allocated to the public sector if the private sector If the risk factor is large, the risk should be allocated to the private sector. Analysis of risk sharing game model Through the above analysis can be found, in fact, the process of PPP risk allocation is essentially the public sector and private sector game negotiations process, the following game to share the results for further analysis. 58

6 International Journal of Management Science and Engineering Research, Volume 4 Issue 2, The Risk of the Public Sector The political risks should be allocated to the government of the PPP project, because the political situation in our country is stable, so that the risk of the public sector should be determined by the fact that the political sector is relatively small and the private sector does not have control to bear. In addition, the land risk of the project, the private sector has no control, the public sector can be achieved through administrative means and such risks should be allocated to the public sector. The Risks Borne by the Private Sector Private sector participation in the PPP project, its fundamental purpose is to obtain long-term stable benefits, and they often have a wealth of project management knowledge, operational experience, a large number of technical professionals and many good partners, so, in comparison, Construction and operation of the risk factors assigned to the private sector to manage more reasonable. Because they have more control, control the lowest cost, and once the risk occurs, the private sector can solve these risks at a lower cost, the public sector does not have these advantages. So the private sector should bear the risk of construction and operation. The Risks Shared by the Public Sector and the Private Sector For a shared risk, if it is difficult to decide about the risk preference is high, then these risk factors can be negotiated to resolve, or through negotiations to determine a range within which the risk is borne by the private sector, The risk beyond this range, subsidized by the government to ensure that the project's economy and attractiveness. All in all, in order to maximize the overall satisfaction of the PPP project, the risk should be combined to achieve the overall risk of the project. Conclusions Whether the risk sharing of the PPP project is reasonable is one of the key factors that affect the success of the PPP project. The public sector and the private sector should negotiate the risk allocation of the project in a win-win situation. When allocating the risk of a project, it should not only follow the principle of taking the corresponding risk to the party with the most risky risk, but also to the principle that the degree of risk to be matched and the risk of the return should be limited. Risk sharing as an important part of risk management, should run through the whole process of the project contract period. In this paper, we use the game theory to calculate the optimal risk sharing ratio between the public sector and the private sector in order to ensure that the two sides can use effective measures to manage the risk of their own sharing and to help each other manage the risks as much as possible, To ensure the normal conduct of the project. REFERENCES [1] Deng Xiaopeng, Li Qiming, Xiong Wei.Study on the Key Risks of PPP Project in Urban Infrastructure Construction [J]. Modern Management Science, 2009 (12). [2] Hu Li, Zhang Weiguo, Ye Xiaoyan.Study on PPP Project Profit Distribution Model Based on SHAPELY Correction [J]. Management Engineer, 2011 (2): [3] Tian Huian. Risk-sharing of quasi-operational infrastructure projects under PPP model [D]. Chongqing University, [4] Guo Yan. Highway PPP Project Risk Sharing and Income Distribution [D]. Chang'an University, [5] He Tao. Based on the PPP model of traffic infrastructure project risk sharing rationalization research [D]. Tianjin University, [6] An Liyuan.Study on Risk Sharing Mechanism Based on PPP Project [J]. Infrastructure Optimization, 2007, (5): [7] Li Yongqiang, Su Zhenmin. Game Analysis of PPP Project Risk Sharing [J]. Infrastructure Optimization, 2005,26 (5):

7 [8] HE Tao, ZHAO Guo-jie. Risk sharing of PPP projects based on stochastic cooperative game model [J]. Systems Engineering, 2011,29 (4): [9] Lai Yifei, Zhao Jing,Research on PPP Mode of Industrial New Town,International Journal of Management Science and Engineering Research, , PP [10] Yifei Lai, Jitao Zhao, Liping Shen,Research on Risk Sharing of PPP Project in Characteristic Town Based on F - ANP Model,Engineering Management Reviews, , PP [11] Ke Yongjian. China PPP project risk fair share [D]. Beijing: Tsinghua University, [12] Wang Shu. Infrastructure PPP project financing risk sharing research [D]. Chongqing Jiaotong University, [13] Humphreys I M, Francis G, Ison S G.An examination of risk transference in air transport privatization [J]. Transportation Quarterly, 2003,57 (4): [14] Li B., Akintoye A., EdwardsP.J., et al. The allocation of risk in PPP / PFI construction projects in the UK [J]. International Journal of Project Management, 2005b, 23 (1): Lai Yifei, born in Jiangxi province in June 1964, is an Associate Professor in Economics and Management School of Wuhan University. Fahad Alam, born in Khyber Pakhtunkhwa province in august 1992, is a Master student in Economics and Management School of Wuhan University. His primary interests are science and technology management. 60