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The diffusion of risks in public private partnership contracts

Istemi Demirag (Hull University Business School, University of Hull, Hull, UK)
Iqbal Khadaroo (Essex Business School, University of Essex, Colchester, UK)
Pamela Stapleton (Manchester Business School, University of Manchester, Manchester, UK)
Caral Stevenson (Department of Social Work and Public Health, Oxford Brookes University, Oxford, UK)

Accounting, Auditing & Accountability Journal

ISSN: 0951-3574

Article publication date: 19 October 2012

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Abstract

Purpose

The UK government argues that the benefits of public private partnership (PPP) in delivering public infrastructure stem from transferring risks to the private sector within a structure in which financiers put their own capital at risk, and the performance‐based payment mechanism, reinforced by the due diligence requirements imposed by the lenders financing the projects. Prior studies of risk in PPPs have investigated “what” risks are allocated and to “whom”, that is to the public or the private sector. The purpose of this study is to examine “how” and “why” PPP risks are diffused by their financiers.

Design/methodology/approach

This study focuses on the financial structure of PPPs and on their financiers. Empirical evidence comes from interviews conducted with equity and debt financiers.

Findings

The findings show that the financial structure of the deals generates risk aversion in both debt and equity financiers and that the need to attract affordable finance leads to risk diffusion through a network of companies using various means that include contractual mitigation through insurance, performance support guarantees, interest rate swaps and inflation hedges. Because of the complexity this process generates, both procurers and suppliers need expensive expert advice. The risk aversion and diffusion and the consequent need for advice add cost to the projects, impacting on the government's economic argument for risk transfer.

Originality/value

The expectation inherent in PPP is that the private sector will better manage those risks allocated to it and because private capital is at risk, financiers will perform due diligence with the ultimate outcome that only viable projects will proceed. This paper presents empirical evidence that raises questions about these expectations.

Keywords

Citation

Demirag, I., Khadaroo, I., Stapleton, P. and Stevenson, C. (2012), "The diffusion of risks in public private partnership contracts", Accounting, Auditing & Accountability Journal, Vol. 25 No. 8, pp. 1317-1339. https://doi.org/10.1108/09513571211275498

Publisher

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Emerald Group Publishing Limited

Copyright © 2012, Emerald Group Publishing Limited

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