Success and Failure in Public–Private Partnerships
Chapter 5: Demand risk mitigation mechanisms
Because demand risk is probably the main challenge facing the public-private partnership (PPP) design in toll motorway privatisation, the introduction of risk mitigation mechanisms is essential. First, theoretically, because these mechanisms articulate the distribution of risks among parties and, therefore, are the instruments that set limits and define the risk transfer to the private sector. Second, in practice, because it is possible that without any protection for investors the private initiative finds the project too uncertain, given the difficulty in forecasting demand, making it hard to receive interested bidders or select winning candidates at reasonable prices. Recall that in both the minimum toll and the minimum duration of the contract auctions bidders will take as critical information the expected demand over the whole life cycle of the concession for the determination of their bid. To cover themselves from large adverse deviations they would offer prices (or durations if the regulator has set the price for users) that would include high premiums for accepting this risk, which would challenge the benefits of privatisation, especially if the demand scenario results in a larger than expected volume. The other side of the uncertain investment is, therefore, the possibility of large gains by charging high tolls and/or collecting them during longer periods.
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