Risk Pricing Inefficiency in Public-Private Partnerships

Transport Reviews Vol. 38, No. 3, pp. 298-321, 2018

36 Pages Posted: 13 Apr 2016 Last revised: 6 May 2018

See all articles by Dejan Makovšek

Dejan Makovšek

International Transport forum at the OECD

Marian W. Moszoro

Warsaw School of Economics (SGH); International Monetary Fund (IMF); George Mason University - Department of Economics; George Mason University - Interdisciplinary Center for Economic Science (ICES)

Date Written: May 13, 2017

Abstract

There is a drive towards delivering and operating public infrastructure through public-private partnership rather than traditional public procurement. The assessment of the value for money achieved by the two alternative approaches rests in the cost of financing and their efficiency in delivery and operation. This paper focuses on the cost of financing, in particular the cost associated with transferring risk from the public to private sphere. If capital markets were efficient and complete, the cost of public (government) and private financing should be the same, with the relative delivery and operational efficiency remaining as the primary determinant of value for money. Evidence suggests, however, that the risk transfer to a public-private partnership entails an inefficient risk pricing premium which goes beyond the direct cost of financing. We argue that a high price for public-private partnerships results from large risk transfers, risk treatment within the private sector, and uncertainty around the past and future performance of public-private consortia. The corollary is that the efficiency gains from a public-private partnership must be much higher than commonly expected to deliver a greater value for the money than under a traditional approach.

Keywords: Public-Private Partnership, Market Efficiency, Risk Transfer, Cost of Capital

JEL Classification: D81, G15, H43, L32

Suggested Citation

Makovšek, Dejan and Moszoro, Marian W., Risk Pricing Inefficiency in Public-Private Partnerships (May 13, 2017). Transport Reviews Vol. 38, No. 3, pp. 298-321, 2018, Available at SSRN: https://ssrn.com/abstract=2763123 or http://dx.doi.org/10.2139/ssrn.2763123

Dejan Makovšek (Contact Author)

International Transport forum at the OECD ( email )

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Marian W. Moszoro

Warsaw School of Economics (SGH) ( email )

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International Monetary Fund (IMF) ( email )

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HOME PAGE: http://economics.gmu.edu/people/mmoszoro

George Mason University - Interdisciplinary Center for Economic Science (ICES) ( email )

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