Construction risk is a major element in all infrastructure projects. A 2002 study compared the procurement of large traditional public sector projects with PPP projects and showed that PPPs had fewer cost overruns and delays (Mott MacDonald, 2002). This 'evidence' was used by government and PPP corporate interests to promote the PPP model in the UK and globally despite the failure to compare like with like (Pollock et al, 2007).
Traditional construction contracts frequently increase in price because contractors seek to recover the loss of profits from low bids, or to increase profits, by submitting claims for additional work and blaming delays on the lack of drawings, subcontractors and/or suppliers. Construction risk is, in effect, shunted down the supply chain. In a PPP, the contractor accepts responsibility for construction risk, but at a price. The value of construction risk as a proportion of construction cost is usually 25%-70% (Shaoul, 2004 and NAO, 2012).
In practice, PPP cost overruns increased from 22% to 35% of projects between 2003-2008 and PPP delays increased from 24% to 31% of projects (NAO, 2009). Meanwhile, cost overruns and delays in traditional public sector projects reduced in the same period to 46% and 37% of projects (ibid).
All projects have risks and infrastructure projects are no exception. There have been few fundamental changes in the nature of design, construction and operational risks in the last three decades, despite the ramping up of the importance of risk in the economy and social life (Whitfield, 2006). Yet new risks and additional public costs imposed with the PPP model, have largely been downplayed or ignored.
Risks must be identified, allocated (retained, shared or transferred) and priced. The public sector usually retains demand risk, such as the number of patients, pupils or other service users, except in PPPs funded by user charges such as public transport or toll roads. The public sector also retains responsibility for political, governance, procurement, specification and contract management risks. Inflation and interest rate and general regulatory risks are usually shared between the public sector and contractor. Design, construction, project finance, maintenance, performance and environmental impact are the key risks transferred to the SPC. However, risk transfer is often overstated and the public sector often ends up bearing the responsibility and cost.
PPP projects have higher borrowing and transaction costs than traditional public sector projects. The pricing of risks to be transferred to the private sector has a key role in determining whether the PPP option provides the best value for money. A Public Sector Comparator (PSC) is frequently used to compare the cost of a traditional public sector project with a PPP option. Because the PPP option is usually believed to be the 'only show in town', the retained risks in the PSC and the transferred risks in the PPP option are often 'adjusted' until the PPP is deemed to provide 'Value for Money' (VfM). The latter should be a full and rigorous assessment of the economic, social and environmental costs, benefits and impacts of the planned project, but usually focuses on financial matters.