Risk in critical infrastructure, being either internal or external, is endemic to the relevant services andwhen critical infrastructure is delivered by public-private partnerships or owned by private actors, the treatment of such risk merits a third-party approach. However, risk in critical infrastructure is sui generis risk which could not be treated contractually and transferred by the public sector to the private sector or retained by the party to an arrangement which is suited best to borne such risks. The process risk allocation is essential for effective PPP contracts, depending on the scope of defined tasks and responsibilities between the parties in their quest to deliver public services. In addition to these case-specific factors, we recommend public agencies follow several general guidelines, including: (i) for MRGs, a collar option (high and low thresholds) performs best since it can preserve the private incentive to increase revenue and performance (ii) institutional stability can play an important role in the level of guarantees, e.g., Chile could employ P3s with fewer guarantees as a result of stable and well-established P3 programs/legislations and (iii) P3 partners should also explore alternative options to mitigate revenue risks such as providing flexible pricing, controlling non-compete clauses, and allowing new technology adaption.
For instance, highly-flexible tolling regulations help mitigate revenue risk since the private partner can adjust tolls to cope with varying demand, and as a result, riskier approaches such as Least Present Value Revenue (LPVR) or even full revenue risk may become acceptable to the private sector. The preferred choice among these approaches depends on the level of demand risk, the risk-taking preferences of both partners, and the nature of the project, among others.
We examine variable availability payments, minimum revenue guarantees (MRG), variable-term contracts, financial re-balancing, and dynamic revenue insurance approaches. We review major revenue risk-sharing approaches developed world-wide that are designed to mitigate concessionaire risk and thus encourage private participation in public-private partnership (P3) arrangements.
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