Risk pricing inefficiency in public-private partnerships

Dejan Makovsek and Marian Moszoro

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Public-private partnership; market efficiency; risk transfer; cost of capital; risk pricing (search for similar items in EconPapers)
JEL-codes: D81 G15 H43 L32 (search for similar items in EconPapers)
Date: 2017-11-29
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Published in Transport Reviews 3.38(2018): pp. 298-321

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https://mpra.ub.uni-muenchen.de/101574/1/MPRA_paper_101574.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/102696/8/MPRA_paper_102696.pdf revised version (application/pdf)

Related works:
Journal Article: Risk pricing inefficiency in public–private partnerships (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:101574

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