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Risk pricing inefficiency in public-private partnerships

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  • Makovsek, Dejan
  • Moszoro, Marian W.

Abstract

There is a drive towards delivering and operating public infrastructure through public-private partnership (PPP) rather than traditional public procurement. The assessment of the value for money achieved by the two alternative approaches rests in the cost of financing and their efficiency in delivery and operation. This paper focuses on the cost of financing, in particular the cost associated with transferring risk from the public to the private sphere. If capital markets were efficient and complete, the cost of public (government) and private financing should be the same, with the relative delivery and operational efficiency remaining as the primary determinant of value-for-money. Evidence suggests, however, that the risk transfer to a PPP entails an inefficient risk pricing premium which goes beyond the direct cost of financing. We argue that a high price for PPPs results from large risk transfers, risk treatment within the private sector, and uncertainty around the past and future performance of public-private consortia. The corollary is that the efficiency gains from a PPP must be much higher than commonly expected to deliver greater value for the money than under a traditional approach.

Suggested Citation

  • Makovsek, Dejan & Moszoro, Marian W., 2017. "Risk pricing inefficiency in public-private partnerships," MPRA Paper 101574, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:101574
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    2. Athena Roumboutsos & Alenka Temeljotov-Salaj & Iosif Karousos, 2020. "Indicators for Sustainable Demand Risk Allocation in Transport Infrastructure Projects," Sustainability, MDPI, Open Access Journal, vol. 12(22), pages 1-23, November.
    3. Dejan Makovšek & Adrian Bridge, 2021. "Procurement Choices and Infrastructure Costs," NBER Chapters, in: Economic Analysis and Infrastructure Investment, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Public-private partnership; market efficiency; risk transfer; cost of capital; risk pricing;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises

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