Risk Transfer and Private Sector Involvement in Public-Private Partnerships

Risk Transfer and Private Sector Involvement in Public Private Partnerships

Source: adapted from The Canadian Council for Public-Private Partnership, 2009.

The governance of a transportation infrastructure project is often a function of the level of risk the private sector is willing to assume. If the private sector is only given the task of designing and building infrastructure, then there is little risk involved since the public sector assumes the financing and operations of the infrastructure. However, in this case, the private sector would not share any of the potential operational revenue. Inversely, in an entirely private context, the private sector assumes all the risks and the revenues. When large and complex infrastructure projects are involved, the private sector is reluctant to assume all the risks, even if the potential revenue could be significant. Pure privatization is, therefore not always the most suitable option.

A public-private partnership involves a level of risk transfer from the public to the private sector, which can take many forms depending upon the degree of private sector involvement. Concessions tend to be the privileged form of PPP for many infrastructure projects, particularly port terminals, since the public sector becomes a landlord (port authority). In contrast, the private sector assumes most of the risks, but also the rewards in the likely case that the investment is profitable. They are particularly dependent on:

  • A well defined concession contract where the roles and responsibilities are clearly identified. This contract serves as a conflict resolution tool and a frame of reference.
  • The expected profitability of the concession. Since the private sector is looking for a level of return on their investments, the concession must be articulated in terms that are financially attractive.
  • A mutually acceptable balance between the risk assumed by the private and public sectors. Concessions are the PPP mechanism likely to involve the highest level of risk from the private sector.
  • A commitment for innovation and long term productivity improvements as the outcome of the concession. This is particularly relevant since the private sector can be more concerned by the short term valuation of a concession and may thus invest in infrastructure and technologies accordingly.