A dynamic performance-based payment mechanism for Public-Private Partnership projects: An integrated model for principal-agent and multi-objective optimization models
Abstract
Performance-based payment mechanism is one of the key issues to ensure all stakeholders’ benefits in infrastructure Public-Private Partnership (PPP) projects. However, most existing research on performance-based payment with a fixed incentive coefficient can’t play a good incentive role. This study aims to the intrinsic mechanism between the performance appraisal score and the performance-based payment structure, so as to design the dynamic performance-based payment mechanism for infrastructure PPP projects. Firstly, the multi-objective optimal method is used to calculate the unit-payment. Second, principal-agent theory is used to construct the performance-based payment model with a changeable incentive coefficient. The findings of this study show that, the performance-based payment mechanism can effectively motivate participants to provide high-quality and efficient services, because their remuneration directly depends on their performance. When the outcome does not meet expectations, the amount paid can be adjusted accordingly, thus ensuring the maximum protection of public resources as well as the private sector’s profits. They serve a dual purpose, on one hand, they offer insights to rectify the shortcomings in the current unsatisfactory payment structure. On the other hand, the study provides a theoretical reference for the public sector to effectively incentivize the private sector in enhancing project performance.
Keyword : multiple-objective programming, payment structure, performance-based payment, PPP, principal-agent theory
How to Cite
Cao, Y., Li, H., & Su, L. (2024). A dynamic performance-based payment mechanism for Public-Private Partnership projects: An integrated model for principal-agent and multi-objective optimization models. International Journal of Strategic Property Management, 28(2), 116–129. https://doi.org/10.3846/ijspm.2024.21183
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Sharma, D. K. (2012). Design of availability payment mechanism for public private partnerships. University of Maryland, College Park.
Sharma, D., & Cui, Q. (2012). Design of concession and annual payments for availability payment public private partnership (PPP) projects [Paper presentation]. Construction Research Congress, West Lafayette, Indiana, US. https://doi.org/10.1061/9780784412329.230
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Shi, L., Li, W. W., & He, Y. J. (2020). An incentive analysis of availability payment mechanism in PPP projects. IEEE Access, 8, 106046–106058. https://doi.org/10.1109/ACCESS.2020.2999932
Soliño, A. S., & Albornoz, C. D. V. A. (2021). Improving the payment mechanism in transport public–private partnerships. Public Money & Management, 41(3), 246–254. https://doi.org/10.1080/09540962.2019.1684013
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Su, L., Cao, Y., Li, H., & Zhang, C. (2024). Water environment treatment PPP projects optimal payment mechanism based on multi-stage dynamic programming model. Engineering, Construction and Architectural Management, 31(2), 866–890. https://doi.org/10.1108/ECAM-04-2022-0291
Wang, Y. L., Cui, P., Liu, & Liu, J. C. (2018). Analysis of the risk-sharing ratio in PPP projects based on government minimum revenue guarantees. International Journal of Project Management, 36(6), 899–909. https://doi.org/10.1016/j.ijproman.2018.01.007
Wu, X. L., Zhou, J., Peng, Y. C., & Duan, Q. K. (2013). Government’s compensation mechanism for PPP project based on game between public and private sector. Chinese Journal of Management Science, 21, 198–203.
Yescombe, E. R. (2007). Public-private partnerships: Principles of policy and finance. Butterworth-Heinemann. https://doi.org/10.1016/B978-075068054-7.50025-3
Zhang, Y., Hou, W., & Qian, Y. (2020). A dynamic simulation model for financing strategy management of infrastructure PPP projects. International Journal of Strategic Property Management, 24(6), 441–455. https://doi.org/10.3846/ijspm.2020.13627
Zhang, Y., Yuan, J., Zhao, J., Cheng, L., & Li, Q. (2022). Hybrid dynamic pricing model for transport PPP projects during the residual concession period. Journal of Construction Engineering and Management, 148(2), Article 04021200. https://doi.org/10.1061/(ASCE)CO.1943-7862.0002218
Aziz, A. A., & Abdelhalim, K. (2017). Comparative analysis of P3 availability payments in the USA and Canada. In Proceedings of the 2nd International Conference on Public-Private Partnerships (pp. 560–573), Austin, Texas, US. https://doi.org/10.1061/9780784480267.044
Chen, R., & Nozick, L. (2016). Integrating congestion pricing and transit investment planning. Transportation Research Part A: Policy and Practice, 89, 124–139. https://doi.org/10.1016/j.tra.2016.04.013
Dai, S., Nie, G., & Wu, Z. (2018). Research on government supervision and enterprise water pollution control based on the principal–agent model. Desalination and Water Treatment, 121, 213–218. https://doi.org/10.5004/dwt.2018.22463
Ding, X., & Li, Q. (2020). Optimal risk allocation in alliance infrastructure projects: A social preference perspective. Frontiers of Engineering Management, 9(2), 326–336. https://doi.org/10.1007/s42524-020-0145-x
European PPP Expertise Centre. (2012). United Kingdom – England: PPP units and related institutional framework. https://www.eib.org/attachments/epec/epec_uk_england_ppp_unit_and_related_institutional_framework_en.pdf
Feng, Z., Song, J. B., Yang, X. X., & Guo, R. (2023). Contractual flexibility, firm effort, and subsidy design: A comparison of PPP project contracts. European Journal of Operational Research, 307(1), 484–496. https://doi.org/10.1016/j.ejor.2022.09.018
Gibbons, R. S. (1992). Game theory for applied economists. Princeton University Press. https://doi.org/10.1515/9781400835881
Giglio, J. M., & Friar, J. (2017). An evaluation of availability based payments for US public-private partnerships. Journal of Business Economics, 8(1), 9–24.
Gill, D., & Stone, R. (2010). Fairness and desert in tournaments. Games and Economic Behavior, 69(2), 346–364. https://doi.org/10.1016/j.geb.2010.01.002
Grout, P. A. (1997). The economics of the private finance initiative. Oxford Review of Economic Policy, 13(4), 53–66. https://doi.org/10.1093/oxrep/13.4.53
Hodge, G. A., & Greve, C. (2007). Public–private partnerships: An international performance review. Public Administration Review, 67, 545–558. https://doi.org/10.1111/j.1540-6210.2007.00736.x
Holmstrom, B., & Milgrom, P. (1991). Multitask principal-agent analyses: Incentive contracts, asset ownership, and job design. Journal of Law, Economics, & Organization, 7(24), 24–52. https://doi.org/10.1093/jleo/7.special_issue.24
Jacopino, A. (2018). Mastering performance based contracts: From why to what to how. Create Space Independent Publishing Platform.
Kweun, J. Y., Wheeler, P. K., & Gifford, J. L. (2017). Evaluating highway public-private partnerships: Evidence from U.S. value for money studies. Transport Policy, 62, 12–20. https://doi.org/10.1016/j.tranpol.2017.03.009
Leviäkangas, P., Ye, Y., & Olatunji, O. A. (2018). Sustainable public-private partnerships: Balancing the multi-actor ecosystem and societal requirements. Frontiers of Engineering, 5, 347–356.
Li, H., Lv, L., Zuo, J., Su, L., & Yuan, C. (2020). Dynamic reputation incentive mechanism for urban water environment treatment PPP projects. Journal of Construction Engineering and Management, 146(8), Article 04020088. https://doi.org/10.1061/(ASCE)CO.1943-7862.0001879
Li, H., Su, L., Zuo, J., Zhao, X., Chang, R., & Wang, F. (2022). Incentive mechanism for performance-based payment of infrastructure PPP projects: Coupling of reputation and ratchet effects. International Journal of Strategic Property Management, 26(1), 35–55. https://doi.org/10.3846/ijspm.2022.15969
Liu, J., Gao, R., Cheah, C., & Luo, J. (2016). Incentive mechanism for inhibiting investors’ opportunistic behavior in PPP projects. International Journal of Project Management, 34(7), 1102–1111. https://doi.org/10.1016/j.ijproman.2016.05.013
Luo, B., Wang, C., & Li, C. (2016). Incentive mechanism design aiming at deflated performance manipulation in retail firms: Based on the ratchet effect and the reputation effect. Mathematical Problems in Engineering, 2016, Article 5412028. https://doi.org/10.1155/2016/5412028
Lv, T., Yan, Y., Li, L., Zhou, Z., Zhang, Z., Zhang, T., & Lin, Z. (2022). Credit-based demand side incentive mechanism optimization for load aggregator. Energy Reports, 8, 227–234. https://doi.org/10.1016/j.egyr.2022.05.138
Ma, L., Hu, Y., Zhu, L., & Ke, Y. (2023). Are public‒private partnerships still an answer for social infrastructure? A systematic literature review. Frontiers of Engineering Management, 10(3), 467–482. https://doi.org/10.1007/s42524-023-0249-1
Narbaev, T. (2022). A meta-analysis of the public-private partnership literature reviews: Exploring the identity of the field. International Journal of Strategic Property Management, 26(4), 318–331. https://doi.org/10.3846/ijspm.2022.17860
Shang, L., & Aziz, A. M. A. (2020). Stackelberg game theory-based optimization model for design of payment mechanism in performance-based PPPs. Journal of Construction Engineering and Management, 146(4), Article 04020029. https://doi.org/10.1061/(ASCE)CO.1943-7862.0001806
Sharma, D. K. (2012). Design of availability payment mechanism for public private partnerships. University of Maryland, College Park.
Sharma, D., & Cui, Q. (2012). Design of concession and annual payments for availability payment public private partnership (PPP) projects [Paper presentation]. Construction Research Congress, West Lafayette, Indiana, US. https://doi.org/10.1061/9780784412329.230
Shen, J., Ogawa, K., & Takahashi, H. (2014). Examining the tradeoff between fixed pay and performance-related pay: A choice experiment approach. Discussion Paper Series, 6, 119–131. https://doi.org/10.15353/rea.v6i2.1415
Shi, L., Li, W. W., & He, Y. J. (2020). An incentive analysis of availability payment mechanism in PPP projects. IEEE Access, 8, 106046–106058. https://doi.org/10.1109/ACCESS.2020.2999932
Soliño, A. S., & Albornoz, C. D. V. A. (2021). Improving the payment mechanism in transport public–private partnerships. Public Money & Management, 41(3), 246–254. https://doi.org/10.1080/09540962.2019.1684013
Su, L., Cao, Y., & Li, H. (2023). Performance-based payment structural design for infrastructure PPP projects. International Journal of Strategic Property Management, 27(2), 133–145. https://doi.org/10.3846/ijspm.2023.19180
Su, L., Cao, Y., Li, H., & Zhang, C. (2024). Water environment treatment PPP projects optimal payment mechanism based on multi-stage dynamic programming model. Engineering, Construction and Architectural Management, 31(2), 866–890. https://doi.org/10.1108/ECAM-04-2022-0291
Wang, Y. L., Cui, P., Liu, & Liu, J. C. (2018). Analysis of the risk-sharing ratio in PPP projects based on government minimum revenue guarantees. International Journal of Project Management, 36(6), 899–909. https://doi.org/10.1016/j.ijproman.2018.01.007
Wu, X. L., Zhou, J., Peng, Y. C., & Duan, Q. K. (2013). Government’s compensation mechanism for PPP project based on game between public and private sector. Chinese Journal of Management Science, 21, 198–203.
Yescombe, E. R. (2007). Public-private partnerships: Principles of policy and finance. Butterworth-Heinemann. https://doi.org/10.1016/B978-075068054-7.50025-3
Zhang, Y., Hou, W., & Qian, Y. (2020). A dynamic simulation model for financing strategy management of infrastructure PPP projects. International Journal of Strategic Property Management, 24(6), 441–455. https://doi.org/10.3846/ijspm.2020.13627
Zhang, Y., Yuan, J., Zhao, J., Cheng, L., & Li, Q. (2022). Hybrid dynamic pricing model for transport PPP projects during the residual concession period. Journal of Construction Engineering and Management, 148(2), Article 04021200. https://doi.org/10.1061/(ASCE)CO.1943-7862.0002218