The diffusion of risks in public private partnership contracts

Demirag, Istemi, Khadaroo, Iqbal, Stapleton, Pamela and Stevenson, Caral (2012) The diffusion of risks in public private partnership contracts. Accounting, Auditing & Accountability Journal, 25 (8). pp. 1317-1339. ISSN 0951-3574

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Purpose – The UK government argues that the benefits of public private partnership (PPP) in
delivering public infrastructure stem from transferring risks to the private sector within a structure in
which financiers put their own capital at risk, and the performance-based payment mechanism,
reinforced by the due diligence requirements imposed by the lenders financing the projects. Prior
studies of risk in PPPs have investigated “what” risks are allocated and to “whom”, that is to the public
or the private sector. The purpose of this study is to examine “how” and “why” PPP risks are diffused
by their financiers.
Design/methodology/approach – This study focuses on the financial structure of PPPs and on
their financiers. Empirical evidence comes from interviews conducted with equity and debt financiers.
Findings – The findings show that the financial structure of the deals generates risk aversion in both
debt and equity financiers and that the need to attract affordable finance leads to risk diffusion
through a network of companies using various means that include contractual mitigation through
insurance, performance support guarantees, interest rate swaps and inflation hedges. Because of the
complexity this process generates, both procurers and suppliers need expensive expert advice. The
risk aversion and diffusion and the consequent need for advice add cost to the projects, impacting on
the government’s economic argument for risk transfer.
Originality/value – The expectation inherent in PPP is that the private sector will better manage
those risks allocated to it and because private capital is at risk, financiers will perform due diligence
with the ultimate outcome that only viable projects will proceed. This paper presents empirical
evidence that raises questions about these expectations.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HJ Public Finance
H Social Sciences > HJ Public Finance > HJ9701 Public accounting. Auditing
Depositing User: Iqbal Khadaroo
Date Deposited: 18 Jan 2016 10:17
Last Modified: 18 Jan 2016 10:17
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