Zou, W. and Kumaraswamy, M.M. (2009) Game theory based understanding of dynamic relationships between public and private sectors in PPPs. In: Dainty, A.R.J. (Ed) Procs 25th Annual ARCOM Conference, 7-9 September 2009, Nottingham, UK, Association of Researchers in Construction Management, 197-205. 197 GAME THEORY BASED UNDERSTANDING OF DYNAMIC RELATIONSHIPS BETWEEN PUBLIC AND PRIVATE SECTORS IN PPPS Weiwu Zou 1 and Mohan Kumaraswamy Centre for Infrastructure and Construction Industry Development, Dept. of Civil Eng., The University of Hong Kong, Pokfulam, Hong Kong The relationships between public and private sectors in public private partnership (PPP) projects can be visualised as structured across different layers: activity layer, resource layer and actor layer. However, these relationships are dynamic and will change when the principal parties face particular problems or encounter serious issues during the long life cycles of most PPP projects. A game theory based approach for understanding such dynamic relationships is developed in this study. In this approach, the dynamic relationships between public and private sectors are analysed as a cooperative game, from risk allocation and financial negotiation to project operation. Variables which influence this relationship are identified from an international questionnaire survey; and will be incorporated into the final game theory based model. This paper presents an approach and corresponding methodology for conceptualising and understanding the behavioural dynamics of the main parties in PPPs. It also provides a theoretical foundation for research on relationships in PPPs. Keywords: dynamic relationship, game theory, PPPs. BACKGROUND AND INTRODUCTION The recent resurgence of PPPs has precedents in previous centuries where private capital was injected into public infrastructure for railroads in USA and water supply in France (Kumaraswamy and Morris, 2002). As a procurement method for public infrastructure projects, PPP spread to many countries, in terms of greater involvements of the private sector over the past few decades. However, the drivers for adopting PPPs also gradually shifted from chasing private funds for public projects, to ‘second generation’ PPPs which focus on greater efficiency and value for money (Kumaraswamy et al., 2007). There are many successful infrastructure PPP projects in Mainland China. The first BOT (Build-Operate-Transfer, which is taken as one form of PPP) project in Mainland China was the Shajiao B Power Station. Hong Kong SAR has also developed mega infrastructure PPP projects, which include 3 cross harbour tunnels, Hong Kong Disneyland and the Asia World Expo convention centre near the new airport. Compared with the conventional project procurement approach which is marked by cost overruns and delays, PPP/PFI projects are usually completed within time while capital expenditure may only slightly exceed budget, given the strong in-built, 1 h0795449@hku.hk