Engel E., Fischer R., Galetovic A. (2014).
Risk and Public Private Partnerships. CESifo DICE Report, Vol. 12 (3), pp. 3-7.
The use of public-private partnerships (PPPs) to replace or supplement the public provision of infrastructure has
become increasingly common. Public infrastructure projects that require large up-front investments, such as highways, light rails, bridges, seaports and airports, water and sewerage, hospitals, prisons and schools, are now often provided as PPPs. A PPP bundles the investment in and service provision of infrastructure into a single, long-term contract. A group of private investors finances and manages the construction of the project, maintains and operates the facilities for a period of 20 to 30 years, and then transfers the assets to the government at the end of the contract. Depending on the project and type of infrastructure, the concessionaire’s revenues are derived from user fees (as in the case of a toll road, for example), or from payments made by the government’s procuring authority (as in the case of prisons).
Risk is a central theme in the PPP discussion and appropriate risk transfer to the private firm is essential for
incentives. How should the different risks that emerge in any PPP be allocated between the government, the private firm and the users of the project? What is the cost of transferring risk to the private party? This paper offers answers to these questions.