Contractual risk sharing mechanisms in US highway PPP projects

Abstract

Public_private partnerships (PPPs) are multilateral transactions implemented via contract over long time horizons. Uncertainty is at the root of many long-term contractual issues, such as incentive allocation, high transaction costs and opportunism. Thus, managing uncertainty in PPP contracts is essential over a project’s life cycle, and risk sharing methods are one approach for addressing such uncertainty. This chapter examines 15 risk sharing mechanisms in 21 United States highway PPP contracts to determine whether these mechanisms were designed through ex ante specification or for ex post resolution. Risk sharing strategies ranged from “event” mechanisms to deductible schemes; the former forego ex ante costs but anticipate ex post, while the latter do the opposite. Findings showed that risk sharing strategies relying on ex post resolution were predominant, so these contracts may incur significant transaction costs in operations. Yet, such strategies provide implicit flexibility to address uncertainty as it resolves.