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Assessing contingent liabilities in public‐private partnerships (PPPs)

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  • Sfakianakis, Emmanouil

    ()
    (European Securities and Markets Authority (ESMA))

  • Laar, Mindel van de

    ()
    (UNU-MERIT / MGSoG, Maastricht University)

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    Abstract

    Public-private partnerships (PPPs) can impose important future cost on the government, which in turn create obligations similar to public debt obligations for financing infrastructure investment. Apart from that, government guarantees, typical in PPP contracts, constitute explicit contingent liabilities. The risk that arises from such guarantees must be transparently valued to assess a country’s fiscal profile. In this study, we aim to show that the notion of a PPP as a (set of) contingent claim(s) can also be used to value the PPP public risk. Valuing contingent claims in this manner is important, as it allows us to compare more carefully different set-ups of a PPP. We introduce and analyse the different scenarios that were at the Chilean government’s disposal for executing a transport infrastructure project. Our findings reveal that, for the first years of a PPP programme, the burden on the surplus or deficit will be less in the case of the PPP compared to typical public investment. Secondly, the net contingent PPP flows constitute the real effect on the deficit and correspondingly on the public debt and weaken the government’s fiscal stance. Finally, we attribute a specific price to the PPP public risk introducing CDS valuation with and without counterparty (government) default.

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    File URL: http://www.merit.unu.edu/publications/wppdf/2012/wp2012-030.pdf
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    Bibliographic Info

    Paper provided by United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT) in its series MERIT Working Papers with number 030.

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    Date of creation: 2012
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    Handle: RePEc:unm:unumer:2012030

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    Related research

    Keywords: PPP; Guarantees; Public Finance; CDS valuation;

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    1. Jeffry M. Netter & William L. Megginson, 2001. "From State to Market: A Survey of Empirical Studies on Privatization," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 321-389, June.
    2. Efraim Sadka, 2006. "Public-Private Partnerships--A Public Economics Perspective," IMF Working Papers 06/77, International Monetary Fund.
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