In general, a project is financially viable for the private institution if the revenue generated by the project covers the costs and provides a sufficient return on investment. On the other hand, the feasibility of the project for the host government depends on its effectiveness in relation to the economic viability of financing the project with public funds. Even if the host government could borrow money on better terms than a private company, other factors could offset this particular advantage. For example, the know-how and efficiency that private enterprise should bring with it, as well as the transfer of risk. Therefore, the private company bears a significant part of the risk. Here are some of the most common risks: a build-operate-transfer (BOT) contract is a model for financing large projects, usually infrastructure projects developed through public-private partnerships. Under a build-operate-transfer contract, a company – usually a government – grants a concession to a private company to finance, build and operate a project. The company operates the project for a period of time (perhaps 20 or 30 years) in order to repay its investment, and then transfers control of the project to the government. In contract theory, several authors have examined the advantages and disadvantages of grouping together the construction and operation phases of infrastructure projects. In particular, Oliver Hart (2003) used the incomplete procurement approach to examine whether incentives for ineligible investments are lower or greater when the different phases of the project are grouped under the direction of a private contractor. [8] Hart (2003) argues that incentives for cost-cutting investments are greater in bundling than in unbundling.
Sometimes, however, incentives for cost-cutting investments can be exaggerated, as they lead to large quality teeth, so it depends on the details of the project whether bundling or unbundling is optimal. Hart`s (2003) work has been expanded in many directions. [9] [10] For example, Bennett and Iossa (2006) and Martimort and Pouyet (2008) examine the interaction of clustering and property rights[11],[12], while Hoppe and Schmitz (2013, 2020) examine the implications of clustering for innovation. [13] [14] Power purchase agreements in which a utility acts as a take-off utility and saves electricity from a private power plant are an example of this agreement. .