Addressing risk and uncertainty
in long-term PPP contracts
June 22, 2018, Paris

Alexander Galetovic, Universidad de los AndesWorking Group Papers , International Transport Forum, 2018

1. Makovšek, D., “Mobilising Private Investment inInfrastructure: Investment De-Risking and Uncertainty”
2. Vasallo, J. M., “Public-Private Partnerships in Transport:
Unbundling Prices from User Charges”
3. Engel, E., R. Fischer and A. Galetovic, “Dealing with theObsolescence of Transport Infrastructure in Public-PrivatePartnerships”

3Idea 1: private participation in transport
infrastructure is modest

4Total and PPP investment in road and rail infrastructure in OECD7* countries(1995-2014, in USD million 2005 prices)

120 000

Private investment in rail and road in infrastructure2005 prices, US$ million

Total investment in rail and road infrastructure

100 000

80 00060 00040 000
20 00001995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Makovsek (2018)

5
Annual world infrastructure spending, (2008-10, USD billion)

TotalPrivate(1)
Públic+ private

(2)
PPP

(3)
Project finance(4)
CorporateTransport
Airports
Seaports
Rail

1,040
80
110400[45─75]

─ndRoads

450

Social infrastructure
Water & sanitation
Oil & gas
Electricity
Telecommunications

490
160
200
810
300

[12─20]──na[140─160][42─48]nanananana

Total
Total private
World GDP (2010)

3,000
1,000
63.000[180─220][680─760][3─5][60─100]

6Idea 2: PPPs have worked well in seaports
and airports; less so in roads and rail

7

PPP performance in transport infrastructure• Seaports and airports (≈ 20 percent of total transport infraspending)– Drewry database: 252 landlord container ports (2014)– PPIAFF database: 141 private/concessioned airports (2014)– Private investment accomodated massive increases in capacity &trade• Rail, roads, tunnels and bridges (≈ 80 percent of totaltransport infra spending)– Small participation in general, and concentrated in a few countries– Contracts are often renegotiated8Idea 3: risk and insufficient funding aredifferent problems

9–Funding: who will pay for the project(users/tolls; taxpayers/budget; a combination→ see Vasallo)–Risk: unpredictable variation in total projectvalue (Revenues ─ Costs): you don’t know
which outcome will realize

10Idea 4: the key question about a risk is: cansome party do something about it?

11The answers• Yes (endogenous risks)− Make good outcomes more likely, and bad oucomes less likely− De-risking: invest/spend to clarify what the risk is about or
reduce the magnitude of the unpredictable variation− The questions: (i) who should be responsible for the risk; (ii)what do you get in exchange for the risk transfer• No (exogenous risks):– Who is best suited to bear/spread the risk?
– The party that bears exogenous risk “sells” insurance– The question: who should sell insurance to whom?

12Idea 5: thoughtful risk allocation is a derisking strategy by itself

13

An example: demand risk in ports and roads• Seaports: quality & speed of service can affectdemand for the port dramatically → substantial
part of demand risk is endogenous → let the PPP
bear demand risk
• Roads: largely exogenous once road is available→ should the government “buy” or “sell”
insurance?14Fixed term PPPs create demand risk ($600)
Year123456789101112High demand(p = 0.5)

100

100

100

100

100

100

100

100

100

100

100

100

Low demand(p = 0.5)

50

50

50

50

50

50

50

50

50

50

50

50

Expected traffic

75

75

75

75

75

75

75

75

75

75

75

75

15Roads and demand risk

• Hard to think that PPP investors are in the insurance
business (SPV + capital market?)• Government can spread risk among taxpayers• Private infrastructure (terminals, pipelines) use takeor-pay contracts• Lot’s of renegotiations because demand was too low16An availability contract ($600)
Year123456789101112High demand(p = 0.5)

100

100

100

100

100

100

100

100

100

100

100

100

Low demand(p = 0.5)

50

50

50

50

50

50

50

50

50

50

50

50

Expected traffic

75

75

75

75

75

75

75

75

75

75

75

75

17A Least-Present-Value-of-Revenues contract ($600)
Year

1

2

3

45

6

78

9101112High demand(p = 0.5)

100

100

100

100

100

100

100

100

100

100

100

100

Low demand(p = 0.5)

50

50

50

50

50

50

50

50

50

505050Expected traffic

757575757575757575757575

18Idea 6: the government has more and better
options if the road PPP doesn’t bear demandrisk

19• PPP revenues and bids are tied to investment, not user
demand, and fixed at the beginning of the concession• A buyout call option is easier to value (Total − ExtantRevenues); the government can retain flexibility without
expropriating– Option to revamp the infrastructure– Option to bear obsolescence risk
• Separation of tolling and funding of PPPs: a road fundwhich pools availability-based contracts (Vasallo’s proposal)

Thank you!