CONTRACT EFFICIENCY AND GUARANTEE OF PFI PROJECTS

Abstract

In this paper, we formulate the PFI project contract scheme as an incomplete contract model to investigate the impacts of project cost risks upon social and financial efficiency of the projects, whereby the main focus is upon asset substitution and project liquidation of PFI projects caused by the limited liability and incompleteness in debt contract. The basic model is extended in a way that the service fee is endogenously determined by the tender mechanism. Furthermore, the paper is concluded by the remark that the social and financial efficiency is simultaneously attained when the government keeps the relevant guarantee from the SPC in advance.