Risk transfer in public private partnerships: a case study from a Finnish municipality

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School of Economics | Master's thesis
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PURPOSE OF THE STUDY The purpose of this Thesis is to explore and evaluate methodology that can be used in estimating the expected costs of risks in public private partnerships (PPP). In my study I develop methodology for analyzing the expected costs of risks and constructing a public sector comparator (PSC) for a PPP project, which is used in evaluating the economic viability of PPP bids against public sector procurement. I apply this methodology to study a real life PPP case being prepared in the City of Kuopio in central Finland. My study includes a thorough analysis of the whole risk analysis process that takes place in the preparation and competitive bidding phase of the public private partnership project. Also the motivation to transfer risks in PPP projects is analyzed from an agency costs perspective. My main research question is related to finding out the role of risk transfer in the overall costs of the project if it was procured with traditional public sector methods. For answering this question I need to be able to analyze the expected costs of risks in the case project and construct a PSC to see, what the role of the costs of risks transferred in the overall cost structure of the PSC is. This kind of research and analysis has not been reported in the previous academic studies concentrating in PPPs. For developing the risk analysis methodology, I review the academic research concentrated on economic evaluation, risk analysis and risk allocation of PPPs in my study. Also a brief introduction to PPPs is presented. DATA The data of my study consists of risk estimates gathered from the representatives of the City of Kuopio, which are used as parameters for conducting Monte Carlo simulations. Also project cost estimates, risk allocation schemes and the whole preparation and risk analysis process is used as data in the study. RESULTS The results for the role of risk transfer in the cost structure of PSC and project risks are surprisingly similar to the ones achieved in the UK where PPPs are vastly used in procuring public sector services and infrastructure. This was surprising as in the UK there is a strong pressure to estimate the risks included in the PSC to be high so that the PPP bids show a lower overall cost and can be accepted. This is because in the UK the PSC is not an available alternative, while in Finnish circumstances it is. The methodology developed and used in the study seems to be well suited to conduct the risk analysis in PPP projects. Using Monte Carlo simulations adds value in the circumstances where there is limited amount of previous data available. KEYWORDS Public private partnerships, risk transfer, risk analysis, agency costs, Monte Carlo simulations
Public private partnerships, PPP, risk transfer, risk analysis, agency costs, Monte Carlo simulations
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