During the 1990s PPP projects using alliances where mooted to implement a full alliances. But alliances combine the benefits of private sector risk taking with government's comparative advantage in securing funds. Alliances bring, however, their own risks. One is the risk of not getting the incentives and sanctions right (Guasch, 2002). There is a need to ensure that the alliance delivers value for money. An alliance should not compromise the principles of accountability and transparency that are so integral to the public sector. Efficient risk allocation may achieve timely and cost-effective delivery targets, instead of transferring risks which will involve paying a risk premium to the contractor for taking those risks and hence increase project costs.
PPPs and Incentives of Project Alliance
Comparison of Allocation Structure | PPP Conventional Allocation | Alliance "Pure" | Public Private Alliance |
Risk |
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Site Risks (local conditions, environment) | Private Party | Shared except in the case of wilful default | Shared except to the extent caused by a breach of the contractor |
Design Construction and Commissioning | Private Party | Shared except in the case of wilful default | Shared except to the extent caused by a breach of the contractor |
Financing | Private Party | Government | Private Party |
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Tax | Private Party | Government | Private Party |
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Operation and Maintenance | Private Party | Shared except in the case of wilful default | Shared except to the extent caused by a breach of the contractor |
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Market | Private Party except to the xtent of specific gov. commitments (availability payments, traffic network changes, interface, etc.) | Government | Shared except to the extent caused by a breach of the contractor |
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Industrial Relations | Private Party | Shared except in the case of wilful default | Private Party |
Legislative and Government Policy | Private/Public (when changes in law/policy of the State is directed specifically to the project | Shared except in the case of wilful default | Shared except to the extent caused by a breach of the contractor |
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Force Majeure | Private Party except when gov. holds some risk of service discontinuity subject to insurance availability | Shared except in the case of wilful default | Private Party except government holds some risk of service discontinuity subject to insurance availability |
Asset Ownership | Private/Public | Government | Private Party |
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Governance | Private/Public | Government | Shared |
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Management | Private/Public (when specific managerial commissions are assigned) | Government | Shared |
Source: Adapted from Clifton and Duffield (2006)
In the table above the public private alliance discussed enhances governances and management because the risks are shared. However, the risk sharing premise of alliancing in PPPs requires integrating budget security. The implementing risk sharing mechanism makes it difficult to have prospects of budget allocations on a multi-year basis since each party adapts to respond to the challenges and risks that emerge. Regardless the obstacles in having multi year budgets in alliancing which can turn complex, incentives in alliances are based on traditional scopes of work contracts and risk allocations, making these arrangements more flexible than PPP/PFI contracts.
Risk allocation principles of PPP/PFI projects are easily written in contracts, but much more difficult to implement. Alliancing allows allocate management of risks at least cost regardless the party associated with this responsibilities. Alliancing may induce fewer contract specifications in commercial requirements, bargaining power and financiers requirements (Clifton and Duffield, 2006). But alliancing is difficult to implement in projects with great degree of complexity such as large infrastructure or multisectorial projects.
Laws and Decrees on Risk Allocation: Latin America Efficient Risk allocation [Brazil: Lei 11.079, Art. 4] The following guidelines shall be observed when contracting public-private partnerships: VI - objective risk sharing among the parties; [Peru - Decreto Legislativo n. 1012 Art. 5] Asignación adecuada de riesgos. Debería existir una adecuada distribución de riesgos entre los sectores público y privado. Es decir que los riesgos deben ser asignados a aquel con mayores capacidades para administrarlos a un menor costo, teniendo en consideración el interés público y el perfil del proyecto Inefficient risk allocation [Mexico: Acuerdo Secretaria de Hacienda Diario Oficial 9 Abril 2004 - Considerando] Que una forma de incrementar la eficiencia en el uso de los recursos del sector público es transferir a los sectores social y privado la mayor cantidad de riesgos y contingencias relacionados con los costos financieros y de ejecución de obras, mediante la utilización de esquemas para la realización de proyectos para prestación de servicios con base a los cuales se celebran contratos de servicios de largo plazo, a fin de que el gasto de cada ejercicio fiscal se concentre en los aspectos más importantes de la función pública. |