Edited by Graeme A. Hodge, Carsten Greve and Anthony E. Boardman
Chapter 12: Risk Management
Rui Sousa Monteiro The conventional approach to risk in PPPs, born of project finance, suffers from some naïvety, because it disregards two main characteristics of this kind of contractual relationship: ● ● PPPs present special characteristics due to their link to public service; the public partner has a much higher (almost infinite) ability to absorb risk, while the private partner has limited legal and financial responsibility. In addition, the conventional approach disregards two important additional institutional aspects: ● ● risk assessment depends on agents’ expectations regarding not only conventionally assessed risks, but also the capacity of the public partner to manage the contract, and the stability of the institutional environment of the project; risk perception changes with the increasing use of PPP contracts, changing the risks themselves. The consequences of these factors for the efficiency and fiscal sustainability of PPP projects are wide-ranging. This will be the central argument put forward in this chapter. In pursuing this argument, the first section will review the conventional risk management for PPP projects. The next section presents a public-choice context that focuses on strategic moves by some players. The third section briefly studies the sources of uncertainty and risk in infrastructure projects. The fourth section discusses the role of risk transfer and risk creation in PPPs. The next section discusses the main risks in PPP projects, using a non-naïve approach. Finally, the last section addresses risk management in a non-naïve context and proposes some institutional mechanisms for addressing PPP risks, and for promoting efficiency...
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