Abstract
It has been argued that public-private partnership (PPP) projects could be better formulated by earlier involvement of the private sector. From the viewpoint of the private sector, however, little incentive exists for them to make proposals about the project formulation before procurement. This paper first compares existing schemes for promoting the private sector proposals and analyzes their consequences. An auction-theoretic optimization problem is set out to formulate interaction between the government and the contractors, according to which their expected utilities are evaluated. Results show that social welfare could be maximized by compensating the cost incurred by a contractor for their proposal. Under certain circumstances, the governments can improve the contractor's expected payoff, as well as their own utility, by setting additional bidding score with some proper rates. Lastly, the paper has examined a case where the contractor can also propose project specifications such as required functions and quality. Though the contractor may be tempted to make over-specified proposals that would undermine the government's welfare, this problem can be averted by conducting a bidding procedure over both the price and specifications themselves after receiving their proposals.
