Public–Private Partnerships for Infrastructure Development
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Public–Private Partnerships for Infrastructure Development

Finance, Stakeholder Alignment, Governance

Edited by Raymond E. Levitt, W. R. Scott and Michael J. Garvin

Large infrastructure projects often face significant cost overruns and stakeholder fragmentation. Public-Private Partnerships (PPPs) allow governments to procure long-term infrastructure services from private providers, rather than developing, financing, and managing infrastructure assets themselves. Aligning public and private interests and institutional logics for decades-long service contracts subject to shifting economic and political contexts creates significant governance challenges. We integrate multiple theoretical perspectives with empirical evidence to examine how experiences from more mature PPP jurisdictions can help improve PPP governance approaches worldwide.
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Chapter 6: Contractual risk sharing mechanisms in US highway PPP projects

Duc A. Nguyen and Michael J. Garvin

Abstract

Public_private partnerships (PPPs) are multilateral transactions implemented via contract over long time horizons. Uncertainty is at the root of many long-term contractual issues, such as incentive allocation, high transaction costs and opportunism. Thus, managing uncertainty in PPP contracts is essential over a project’s life cycle, and risk sharing methods are one approach for addressing such uncertainty. This chapter examines 15 risk sharing mechanisms in 21 United States highway PPP contracts to determine whether these mechanisms were designed through ex ante specification or for ex post resolution. Risk sharing strategies ranged from “event” mechanisms to deductible schemes; the former forego ex ante costs but anticipate ex post, while the latter do the opposite. Findings showed that risk sharing strategies relying on ex post resolution were predominant, so these contracts may incur significant transaction costs in operations. Yet, such strategies provide implicit flexibility to address uncertainty as it resolves.

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