Valuing Public-Sector Revenue Risk Exposure in Transportation Public–Private Partnerships

Abstract

A methodological framework can be used to evaluate public revenue financial risk exposure when transportation infrastructure is delivered through public–private partnerships (PPPs) in the United States. Transportation agencies worldwide and across the United States are increasingly using PPPs as a mechanism to deliver infrastructure. An analysis of international experience conducted for this research shows that countries with more extensive experience in PPPs than the United States have devised sophisticated methodologies to value and manage risk exposure in the context of value for money and optimum allocation of project risks. However, a review of major U.S. transportation PPP transactions reveals that U.S. states currently lack a well-documented methodology to quantify and incorporate the cost of public-sector risk into the evaluation of PPP projects. This evidence suggests that U.S. transportation agencies might benefit significantly from implementing more systematic approaches to incorporate the cost of risk in the evaluation of PPP projects. The framework proposed in this research provides a step-by-step methodology to quantify revenue risk exposure and is aimed at facilitating the estimation of the risk-adjusted costs of delivering a project as a PPP. The methodology is based on the concept of contingent liabilities and uses option pricing techniques. The application of the methodology is demonstrated by two U.S. transportation PPP case studies.

Epitomising Public Sector Management of Public Private Partnerships: A Trajectory of Good Governance

“…Risk is the possibility of adverse events occurring and subsequently causing deviations in actual project outcomes or threatening the successful completion of projects (Aldrete, Bujanda & Valdez-Ceniceros, 2010;Manrique Millones, 2010). As such, PPP risks arise from the uncertainty about the future occurrence of some events and their impact on project activities (Yong, 2010:15), which erupt when vulnerable PPP conditions are exposed to a threat (Burger, Tyson, Karpowicz & Coelho, 2009).…”

“…Such is aggravated by heavy private sector investment in PPP projects, yet revenue comes in after a long time and payment is spread over many years. Consequently, the government uses guarantees to make PPP projects commercially viable, and to safeguard private sector interests (Aldrete et al, 2010;Irwin, 2007). However, failure by the public sector to cautiously allocate and share risks with the private sector, may cause the government to find guarantees very costly to implement.…”

Revenue Risk Evaluation for PPP Road Infrastructure

“…This method assumes that traffic volume which is an uncertainty va r iable is t he u nderly i ng fac tor i n determining the option price. Moreover, the rights that the private sector is able to acquire using the minimum income guarantee can be calculated using the Monte-Carlo model (Cheah and Liu 2006;Huang and Chou, 2006;Jun, 2008;Aldrete et al, 2012;Chang and Lee, 2012;Ku et al, 2017).…”

Data Review of Transportation Infrastructure Public–Private Partnership: A Meta-Analysis

“…In the end, 95 studies were selected, all of which were conducted in the period of2002Aldrete, Bujanda, & Valdez, 2012;Anastasopoulos et al, 2011;Asenova, Beck, Akintoye, Hardcastle, & Chinyio, 2002;Bajari, Houghton, & Tadelis, 2006;Baker, 2012;Bernardino, Hřebíček, & Marques, 2010;Bidne et al, 2012;Bing et al, 2005;Blanc-Brude, Goldsmith, & Välilä, 2006, 2007Blanc-Brude & Makovsek, 2013;Bonnafous, 2010;Bunch, 2012;Button & Chen, 2014;Button & Daito, 2014;Buxbaum & Ortiz, 2009;Carbonara, Costantino, & Pellegrino, 2014; Carbonara, Costantiono, & Roberta, 2014;Carpintero & Gomez-Ibañ ez, 2011;Caselli, Gatti, & Marciante, 2009;Chan, Yeung, Yu, Wang, & Ke, 2010;Chasey et al, 2012;Checherita, 2009;Chen & Hubbard, 2012;Cheung & Chan, 2010Cheung, Chan, & Kajewski, 2009;Chiu, 2006;Chou, Ping Tserng, Lin, & Yeh, 2012;Chung et al, 2010;Clifton & Duffield, 2006;Cruz & Marques, 2011Daito, Chen, Gifford, Porter, & Gudgel, 2013;De Brux, 2010De Jong, Mu, Stead, Ma, & Xi, 2010;Demirag et al, 2011;Dewatripont & Legros, 2005;Diggs & Roman, 2012;…”