Fiscal effects and public risk in public-private partnerships

Abstract

Purpose -PPPs can impose important future public costs, while PPP government guarantees create explicit contingent liabilities similar to public debt obligations. The risk that arises from such partnerships must be transparently valued to assess a country's fiscal profile. The purpose of this study is to show that the notion of a PPP as a (set of) contingent claim(s) can also be used to value the PPP public risk. Design/methodology/approach -Taking a finance perspective, the paper refers to more traditional cases of asset valuation, applies them to a PPP and compares more carefully different set-ups of a PPP. The paper introduces and analyzes the different scenarios that were at the government's disposal for executing a transport infrastructure project. Findings -The findings reveal that, for the first years, the burden on the surplus or deficit will be less in the case of the PPP compares to typical public investment. Secondly, the net contingent PPP flows constitute the real effect on the deficit and correspondingly on the public debt and weaken the government's fiscal position. Finally, the paper attributes a specific price to the PPP public risk introducing CDS valuation with and without counterparty (government) default. Originality/value -This study, by proposing a method to evaluate PPP risk, complements previous literature on PPPs, which touches upon issues mainly related to the description of PPP types, the effect of contingent commitments and the accounting classification of PPP assets.

The Effect of Completion Risk and Project Profitability on the Investment Decisions of the Private Sector in PPP Projects

“…From this figure, it is apparent that reducing the risk-free interest rate, such as the bank deposit rate and the treasury bond rate, can motivate the private sector to invest in a PPP project. is result is consistent with the findings of Owusu-Manu et al [38] who studied how sociopolitical and economic factors affect private sector participation in PPP projects. In their study, they argued that reducing the risk-free interest rate can lower the opportunity cost of the private sector [38].…”

“…is result is consistent with the findings of Owusu-Manu et al [38] who studied how sociopolitical and economic factors affect private sector participation in PPP projects. In their study, they argued that reducing the risk-free interest rate can lower the opportunity cost of the private sector [38]. Moreover, it can also be seen that the wedge between the two investment boundaries grows with the risk-free interest rate.…”

“…First, the relation between the probability of the completion risk and the investment boundary is investigated (see Figure 1). e value of the volatility is set at 0.5 (σ � 0.5), which is reasonable because it is difficult to predict the cash flow of PPP projects precisely [5,38]. e value of the expected rate of return of the project is set at 0.08 (μ � 0.08), the value of the tax rate is set at 0.3 (τ � 0.3), and the value of the default cost rate is set at 0.6 (α � 0.6).…”

Abridging the Housing Infrastructure Deficit in Nigeria through PPPs

“…26 Sfakianakis and Van de Laar, on the other hand, consider PPP as the foundation for public procurement and full privatization. 27 Any endeavour to shift the function of the government to private enterprises is endorsed by Abdul-Aziz and Kassim as being similar to privatization. 28 PPP, however, is not the same as privatization.…”

The demand hierarchy of the government and investors in PPP projects

“…The local government expects to make full use of the advantages of PPP to effectively reduce the financial burden and implicit debt risk and transfer the business risk (Cui et al. , 2018; Sfakianakis et al. , 2013; Hodge, 2004).…”