Government compensation and costs of non-competition guarantee for PPP rental retirement villages

Purpose

Targeting public–private partnership (PPP) rental retirement villages, the purpose of this paper is to bring forward the solution of insufficient research in a non-competitive guarantee (a restrictive agreement) towards the compensation and guarantee costs in consideration of benefit redistribution if the governments are unable to keep the promise on guarantee provision.

Design/methodology/approach

Real option principles are applied to assess the public–private investment proportions and the expected return rates of the private sector in a non-competitive guarantee and analyse their effects on the public–private benefit and risk allocations as well as the success of the project. Instead of granting direct capital support, this research accomplishes the compensation of non-competition guarantee by adjusting the project benefit distribution ratios between the government and the private sector to achieve the option value of the guarantee. An empirical example with alternative scales, which is developed from an existing rental village in Geelong, is used to numerically verify the research process.

Findings

The results illustrate that the option value of the non-competition guarantee plays an important role in supporting the implementation of the PPP rental retirement village projects. The option value of the non-competition guarantee has a close relationship with the guarantee level and the government guarantee cost, which is positively correlated with the guarantee level and negatively correlated with the government guarantee cost. To reduce the government guarantee cost, the government should carefully determine the public–private investment proportion, appropriately control the return rate of the private sector and approve the construction of the new project after the investment recovery of the private sector.

Research limitations/implications

This research mainly focusses on the economic loss of the government due to the guarantee responsibility. Further research could be conducted to determine the guarantee level more precisely and take the social cost of the government guarantees into consideration.

Originality/value

This research is the first attempt to investigate the government compensation and costs of non-competition guarantee for PPP rental retirement village projects and will enhance the understanding of the nature of PPP applications. The evaluation process and the implementation of the compensation through the adjustment of benefit distribution provides a comprehensive method to analyse the non-competition guarantee of PPP projects and help the parties negotiate in good faith to agree on a method of redress.