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| The Optimal Contract for Green PPP Project Portfolios: A Welfare Perspective for Economic and Environmental Effects |
| WEI Xiaoyun, HAN Liyan
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School of Statistics, Capital University of Economics and Business;
School of Economics and Management, Beihang University |
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Abstract Green finance serves green investment, which serves the green economy. In practice, there is a huge demand for funds to develop green finance and promote environmental protection. In addition, it is unsustainable to rely solely on government financial support. Therefore, an important solution for this problem is public-private partnerships (PPP), in which the government and enterprises work together. However, enterprises are not enthusiastic participants of pollution prevention, green, and low-carbon PPP projects because they generally experience problems such as high investment thresholds, competition homogeneity, and high market risk.
Although the direction of the new incentive method is clear, relying only on the traditional PPP contract framework is insufficient to manage the complex problems that arise when managing project portfolios. Thus, the contract model for traditional single-commercial PPP projects cannot be directly adopted. The key issues involved in the green PPP project portfolio are as follows: What elements must be considered when concluding the contract？ What coordination mechanism must be selected to ensure that the contract is signed？ Is there an optimal concession period for green PPP projects？ Is the green PPP project portfolio better than the traditional incentive mechanisms of direct government subsidies？ Exploring these issues will provide a good theoretical basis and technical support for the promotion and implementation of the combination of green PPP and high-yield projects.
This paper uses the net present value method to propose a decision-making model for the optimal concession period of green PPP project portfolios based on the win-win goal of economic and environmental benefits. Our model differs from those of the literature in three dimensions. First, we introduce environmental benefits and extend the optimal concession period model for a single PPP project to the green PPP project portfolio. The goals of combining green PPP and high-yield projects include social welfare, environmental benefits, consumer surplus, and economic profits of enterprises and the government. Second, we compare the different game modes between the government and the enterprises, demonstrate the existence of an equilibrium, reveal the internal logic and key determinants of the optimal concession period, and provide a basic framework for the contract design of the green PPP project portfolio. Third, through a scenario analysis, we show the superiority of the green PPP project portfolio over the traditional incentive mechanism of direct government subsidies. The results provide theoretical support for promoting the combination of green PPP and high-yield projects.
We obtain three important results. First, the combination of green PPP and high-yield projects can improve enterprise profits and stimulate social capital to participate in environmental governance and deal with environmental risks. Second, whether the government-enterprise contract can be signed successfully depends on the game decision-making mode. If the decision is made independently, although the concession period that maximizes enterprise profits can also achieve the highest environmental benefits, the game results are shown as “equilibrium on the edge” and it is difficult for both parties to enter into a contract. Therefore, it is necessary to study the behavioral restraint mechanism to promote coordination and cooperation between the government and enterprises. PPP stakeholders can then decide from a global optimal perspective and achieve a win-win situation of mutual economic profit and environmental protection. Third, compared with direct government subsidies, the combination of green PPP and high-yield projects not only increases consumer surplus and improves social welfare, but also copes better with the fisical burden. Therefore, policy guidance could be strengthened to manage the reasonable bundling of projects with strong correlation, upstream and downstream links, or adjacent sub-projects. Some direct government subsidies will gradually be replaced by the combination of green PPP and high-yield projects. The diversified funds can then be used to provide continuous support for environmental protection, achieve the goals of emission peak and carbon neutrality, and better serve the green economy and sustainable development.
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Received: 07 January 2019
Published: 25 April 2022
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