The combined effect of marginal social and private benefit on the socially optimal equity structure of PPP projects

Although bundling in public–private partnership (PPP) projects fosters cost savings in the provision of public services, such savings might come at the expense of social benefits due to the low quality of non-contractible services and the incompleteness of the contract. A game model is presented to analyse how the equity allocation between private partners—typically, building firms and operating firms—indirectly influences their incentives, in order to improve the quality of non-contractible services. The findings show that the equity structure can effectively compensate for the incompleteness of the contract. When the equity structure is privately negotiated by private partners whose only concern is private benefits, a loss of social benefits due to the low quality of non-contractible services occurs because the penalties are not enforceable. A socially optimal equity structure, which depends on the combined effects of marginal social and private benefits, plays a role in aligning these social and private benefits, thereby providing private partners with appropriate incentives to improve non-contractible services. These findings provide insights into the regulation of the equity structure for PPP projects providing services in diverse sectors.