Introduction
Public-private partnerships are often described as collaborations between government and private enterprise. But a PPP agreement is not simply about cooperation.
At its core, a PPP project is an exercise in allocating risk.
Background
Construction risk, financing risk, demand risk, land risk, regulatory risk and operational risk may all arise during the life of a project.
The central question is whether each risk has been placed with the party that is best positioned to control or manage it.
Court's Findings / Legal Analysis
A private concessionaire may be better positioned to manage construction and operational risks. A government authority may have greater control over certain statutory approvals, public land or regulatory decisions.
Problems arise when a contract transfers a risk to a party that has little practical ability to control it.
Demand risk is another important issue. Roads, transport systems and other public infrastructure may depend upon projected usage. If actual demand is substantially lower than anticipated, the financial viability of the private participant may be affected even though construction was completed properly.
Why the Judgment Matters
The success of a PPP project can depend upon whether the original financial assumptions remain realistic throughout the concession period.
Regulatory changes create another layer of uncertainty. Infrastructure projects may operate for decades, during which laws, taxes and regulatory requirements can change significantly.
Key Takeaways
Risk should generally be allocated to the party best positioned to manage it.
Contracts should clearly identify the consequences arising from regulatory changes.
Demand projections should not be treated as guaranteed revenue unless the contractual structure provides for such protection.
Conclusion
The success of a PPP project depends less on the phrase "public-private partnership" and more on the precision of its risk allocation.
When the contract clearly identifies who controls a risk, who bears its cost and what happens when the risk materialises, disputes become easier to manage.
