Determination of government guarantee and revenue cap in public–private partnership contracts

PurposeConsidering there is a lack of research in determining the optimal levels of government guarantee and revenue cap, the objective of this research is to determine their optimal levels to achieve a reasonable financial risk allocation between governments and private investors while avoiding overly lucrative conditions for private investors.Design/methodology/approachExpanded net present value (NPV) analysis and bargaining game theory are employed to construct the core of the determination process. The risk gap between governments and private investors is assessed via an expanded NPV analysis to see if the financial risk has been shared reasonably, based on which the range of the government guarantee is decided. A bargaining model is then created to help locate the optimal level of the government guarantee. Finally, a revenue cap, often combined with the government guarantee in public–private partnership (PPP) agreements, will be determined if overly lucrative conditions for private investors are observed or governments suffer a risk spillover.FindingsReferring to a real PPP project in Australia, Project BA is created to validate the applicability of the proposed determination process. The outcome shows that the proposed determination process in this paper is capable of determining the optimal levels of government guarantee and revenue cap. The government preferences towards risk allocation will influence the values of the optimal levels. Governments may also consider to alleviate the control over investors' net profits to mobilise private investors into PPP projects.Research limitations/implicationsThere is a potential possibility that the revenue cap fails to control the financial risk for governments or the overly lucrative condition for private investors. In other words, even though the revenue cap is set at the minimal level, the financial risk for governments still beyond their tolerance range or the overly lucrative condition for private investors still occurs. Future research may focus on other financial protective schemes which help to better control the financial risks for governments and profits for private investors.Originality/valueGovernment guarantees are frequently used as an investment incentive to reduce the probabilities of suffering loss for private investors. Nevertheless, the financial risks for governments may increase after providing guarantees and, as a result, revenue cap is required by governments to avoid placing themselves in an unprotected situation. By recognising the importance of the two contractual parameters, many scholars dig into their option values. However, there are very rare research works focussing on the method of determining the specific levels of government guarantee and revenue cap. To overcome the limitations of existing models and enrich the methodology for government guarantee and revenue cap determination, this paper contributes to the body of knowledge by developing a government guarantee and revenue cap determination process which contributes to a reasonable allocation of financial risks between governments and private investors

Measuring the developing trends of international construction industries in global value chains based on value added

The construction sector is an indispensable element of social economies. The international trade activities for the local construction sectors have been stimulated by the demands of globalization, which accelerates the transfer of value added in the global value chains. This study constructs a measurement framework for the developing trends in the global value chains based on value added and picks up the international construction industries at the sectoral level. Based on the participation index, the position index, and the connection index, the developing trend is measured in order to comprehensively identify the ability of the national construction sectors due to value added in the global value chain. The study results show that the influence on the global value chain derived from technical advantage decreased with the improvement of the construction sectors in emerging economies. The international construction sectors were reallocated based on geographical distribution and competitive advantage after 2008. This paper will prove useful for policymakers by providing a clear method for identifying the precise location in the global value chain of a specific country. Governments can consider sectoral planning at regional and global levels based on a map of advantages and disadvantages