Contractual Approach to Optimising Risk Sharing: A Quantitative Study of the Multidimensional Nature of Risk in Private Provision of Road Infrastructure

Abstract

Public-Private-Partnerships (PPPs) are a public procurement policy that argues in support of greater value for money through optimal risk-sharing, by aligning incentives among parties who are profoundly different in terms of interests, objectives and risk preferences. The subject of interest in this thesis is tollroads that are procured under the PPP method, which traditionally involves the transfer of demand risk to the private sector. Designing contracts to share risk in light of incentive problems is the central premise of contract theory, yet the risk-sharing implications have rarely been adequately tested using micro data at the decision-maker level. In addition, empirical contract studies tend to ignore the risk preferences of contracting parties or assume that the stereotypical risk-averse agent and risk-neutral principal are present in all contractual relationships. This thesis addresses these shortcomings by presenting the methodology and empirical findings of an online survey within which a stated choice experiment was designed to capture the risk perceptions of contracting parties to a number of hypothetical PPP tollroad concessions. Information from 101 participants drawing on their project experience over 32 countries was collected within an advanced computer-aided personal survey instrument, to condition model estimates on observing the manner in which respondents processed the information presented to them to test the impact of contractual conditions and external institutional variables on their risk preferences, and hence their choice behaviour. While the findings of this thesis support the concept that risk-sharing in PPPs is in line with contract theory’s incentive alignment proposition, they refute the common belief in contract theory with respect to stereotypical economic actors. Moreover, the results demonstrate the powerful incentive effect of property rights to ex post surplus. There are a number of significant implications as to the design of contracts and reform of public policy if PPPs are to gain popularity and to attain value for money. To induce appropriate ex post performance efficiency, ex ante property rights need to be complemented with equitable risk-sharing among contracting parties. Uptake of the policy by the market can be enhanced by modifications to the identified institutional variables and contractual conditions. Finally, the thesis appeals to the theories of decision making to further pursue the influence of human cognition, particularly bounded rationality, on our decision choices.