Optimal allocation of risk
M Woolston, S Saris, P Smith
Publication Date (Web): 21 December 2017
DOI: https://doi.org/10.21139/wej.2018.003

Governments throughout the world have been using public private partnerships (PPPs) over the past 20 years for three key reasons. First, PPPs have been effective in helping governments respond to the increasing demand for infrastructure-related services. Second, by shifting the burden of capital spending to the private sector, PPPs can help governments do more with less. Third, PPPs contribute to enhanced efficiency in delivering services.

PPPs are not, however, the answer to all infrastructure or public service shortcomings. Successful PPPs require careful risk allocation and a strong enabling environment, which are a challenge to achieve. In addition, most PPP failures arise from poor contract preparation, inadequate risk allocation, the absence of competitive and transparent tendering procedures, and poor contract monitoring and enforcement systems.

A wide range of approaches for enhanced private sector participation in water have been commonly used in different circumstances around the world. Experience has been mixed: there has been considerable success, but also many examples where desired outcomes have not been achieved. 


PPPs are about partnerships. In our experience, a Government or Authority who seeks to push all the risks to the private sector will note their project is not well received and is likely to fail. Finally, a strong enabling environment is crucial. Clear legislation or enabling regulation is a pre-requisite and will encourage investor confidence. The ideal PPP sees competition among private sector participants in both the debt and equity markets, resulting in delivery of high quality public services at the lowest possible cost. Long term undertakings from the public sector (e.g. tariffs, concessions, management fees, etc.) underpin private sector returns, and a track record in honouring public obligations will attract further private investment. A well-developed framework, enabling legislation or regulation and fair risk allocation is necessary to attract private sector investment dollars into infrastructure as many countries increasingly look to compete for private sector capital to deliver their infrastructure needs.

The purpose of this paper is to set out the scope and range of PPP models, to aid in the selection of the most appropriate form of PPP and provide options for optimal risk allocation for enhanced private sector participation.

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