The diffusion of risks in public private partnership contracts

Abstract

PurposeThe UK government argues that the benefits of public private partnership (PPP) in delivering public infrastructure stem from transferring risks to the private sector within a structure in which financiers put their own capital at risk, and the performance‐based payment mechanism, reinforced by the due diligence requirements imposed by the lenders financing the projects. Prior studies of risk in PPPs have investigated “what” risks are allocated and to “whom”, that is to the public or the private sector. The purpose of this study is to examine “how” and “why” PPP risks are diffused by their financiers.Design/methodology/approachThis study focuses on the financial structure of PPPs and on their financiers. Empirical evidence comes from interviews conducted with equity and debt financiers.FindingsThe findings show that the financial structure of the deals generates risk aversion in both debt and equity financiers and that the need to attract affordable finance leads to risk diffusion through a network of companies using various means that include contractual mitigation through insurance, performance support guarantees, interest rate swaps and inflation hedges. Because of the complexity this process generates, both procurers and suppliers need expensive expert advice. The risk aversion and diffusion and the consequent need for advice add cost to the projects, impacting on the government's economic argument for risk transfer.Originality/valueThe expectation inherent in PPP is that the private sector will better manage those risks allocated to it and because private capital is at risk, financiers will perform due diligence with the ultimate outcome that only viable projects will proceed. This paper presents empirical evidence that raises questions about these expectations.

Requirements as Operational Metrics? – Case: Finnish Defense Forces

“…ln a partnership, two parties conduct joint decision making and specify the problem, solution, and product in the joint process." Demirag et al, 2012, p. 1318 [2] ". .…”

“…Over the past 25 years there have been more than 1300 public private partnership (PPP) contracts in EU worth more than 5 million [1]. Purpose of the PPP is to reduce costs, enhance efficiency and transfer operational risk in the operations previously run by public entity by transferring these functions to a privately run entity/company [2]. PPP is a widely studied subject but still questions referring to responsibilities, overall roles of these profit generating enterprises and most of all management of the relationship causes debate.…”

Firm-level conditions to engage in public-private partnerships: What can we learn?

“…The grantor likely will choose an operator expecting to sustain activity during the period of the arrangement. Additionally, small firms have entry barriers (Demirag et al, 2012) and the size of the market matters (Sharma, 2012) when it comes to attracting PPPs. Because of these arguments, it is expected that larger firms have a higher probability of entering into a PPP/SCA.…”

“…The basic financial structure of a PPP/CSA, as for a PFI, could be ninety per cent debt and ten per cent equity, with the debt element consisting mainly of bank loans or bonds (Wall and Connolly, 2009). Demirag et al (2012) were one of the first doing preliminary research regarding this topic, interviewing personnel from five organisations involved in the provision of equity and debt finance for PFI projects. They contributed to one of the most important questions related to financing and risks of these types of contracts.…”

“…For instance, Froud (2003) does not argue that the private sector can deliver a range of lower cost services; instead, he questions whether the State should assume the role of managing those specific risks. Prior works on risk in PPP/SCAs have investigated "what" risks were allocated and to "whom" (e.g., Li, Akintoye, Edwards, & Hardcastle, 2005;Quiggin (2005); Shen, Platten, & Deng, 2006;Singh & Kalidindi, 2006), "how" and "why" risks were diffused by their financiers (Demirag, Khadaroo, Stapleton, & Stevenson, 2012), and how the goals of certain contracts appear to be changing in favour of private partners at the expense of taxpayers (Burke & Demirag, 2013). While studies of risk have been performed, there has been considerable disagreement on how to account for PPP/SCAs in the balance sheets of the public and private sectors.…”