Valuing Public-Sector Revenue Risk Exposure in Transportation Public–Private Partnerships

Abstract

A methodological framework can be used to evaluate public revenue financial risk exposure when transportation infrastructure is delivered through public–private partnerships (PPPs) in the United States. Transportation agencies worldwide and across the United States are increasingly using PPPs as a mechanism to deliver infrastructure. An analysis of international experience conducted for this research shows that countries with more extensive experience in PPPs than the United States have devised sophisticated methodologies to value and manage risk exposure in the context of value for money and optimum allocation of project risks. However, a review of major U.S. transportation PPP transactions reveals that U.S. states currently lack a well-documented methodology to quantify and incorporate the cost of public-sector risk into the evaluation of PPP projects. This evidence suggests that U.S. transportation agencies might benefit significantly from implementing more systematic approaches to incorporate the cost of risk in the evaluation of PPP projects. The framework proposed in this research provides a step-by-step methodology to quantify revenue risk exposure and is aimed at facilitating the estimation of the risk-adjusted costs of delivering a project as a PPP. The methodology is based on the concept of contingent liabilities and uses option pricing techniques. The application of the methodology is demonstrated by two U.S. transportation PPP case studies.