The effect of completion risk and project profitability on the investment decisions of the private sector in PPP projects

Public-private partnership (PPP) is becoming increasingly popular around the world for the development of infrastructure. However, it is vital that the private sector knows how to make its investment decisions, especially when it bears the burden of completion risk, and the cash flow of PPP projects is hard to predict. In previous studies, completion risk and project profitability have been recognized as critical factors that influence the involvement of the private sector in PPP projects. This study further investigates how these two factors affect private sector investment decisions, including its involvement, withdrawal, and capital structure decisions. First, a continuous real option method is built to explore the investment boundary and default boundary of the private sector. The results show that an increase in completion risk does not necessarily increase the investment boundary; rather, the relationship between them depends on the degree of private sector risk tolerance. The results also indicate that the investment boundary decreases with the expected rate of return and increases with the tax rate, risk-free rate, and volatility of cash flow. The default boundary decreases with the expected rate of return and volatility of cash flow and increases with the risk-free rate. Second, by comparing two different financial arrangements, the results suggest that using debt capital can help lower the private sector's investment boundary. Third, the results reveal the optimal debt level of private sector investment in PPP projects by showing that the optimal debt level increases with the tax rate and decreases with the default loss rate. These results can provide some managerial insights for the private sector as it makes decisions on PPP project investments. They can also provide some policy insights for governments to better promote private sector investment in PPP projects

Balancing private investment and community expectations in public-private-partnership projects : a novel approach for evaluating long-term value

Balancing private investment and community expectations is always crucial in social Public-private-Partnership (PPP) projects, such as schools, public housing, and hospitals. Evaluating the value of such PPPs requires the governments to accurately assess costs, risks, and benefits through their Public Sector Comparator (PSC). The Public Sector Comparator (PSC) focuses on the economic benefits and tangible value offered by bidders, such as whole-of-life financing costs, capital costs, operation, maintenance costs, and risk allocation as proposed by the government. Non-monetized benefits, which are vital during the delivery of social infrastructure, are typically evaluated heuristically by comparing specific solutions proposed by bidders. However, assessing uncertainties in government requirements and materialized risks when comparing a bid to Public Sector Comparator (PSC) using discounted cost techniques at a specific point in time is challenging. Therefore, this paper proposes a novel approach for evaluating investments that considers non-monetary benefits over a PPP project’s life cycle, based on the risks and benefits seen in recent social PPP projects. Engineering reliability analysis is preferred in this study to emphasize the performance reliability of investment decisions. The proposed reliability-based evaluation considers not only cost uncertainty and non-monetary benefits based on project observations but allows for time-based decision-making by being used at multiple points in time, to be incorporated into the original investment decision. Future case study is expected to demonstrate that the proposed approach allows for predicting long-term value by using a performance reliability index to measure the robustness of the original investment assumptions such as demand projections and future sustainability outcomes

[In Press] Evaluating uncertainties to deliver enhanced service performance in education PPPs : a hierarchical reliability framework

Purpose: This study aims to develop a hierarchical reliability framework to evaluate the service delivery performance of education public–private partnerships (PPPs) effectively and efficiently during long-term operations. Design/methodology/approach: The research design included development and test phases. In the development phase, three performance layers, i.e. indicator, component and system, in the education service delivery system were identified. Then, service component reliability was computed through first order reliability method (FORM). Finally, the reliability of the service system was obtained using dynamic component weightings. A PPP school example in Australia was set up in the test phase, where performance indicators were collected from relevant contract documents and performance data were simulated under three assumptive scenarios. Findings: The example in the test phase yielded good results for the developed framework in evaluating uncertainties of service delivery performance for education PPPs. Potentially underperforming services from the component to the system level at dynamic timepoints were identified, and effective preventative maintenance strategies were developed. Research limitations/implications: This research enriches reliability theory and performance evaluation research on education PPPs. First, a series of performance evaluation indicators are constructed for assessing the performance of the service delivery of the education PPP operations. Then, a reliability-based framework for service components and system is developed to predict service performance of the PPP school operations with consideration of a range of uncertainties during project delivery. Practical implications: The developed framework was illustrated with a real-world case study. It demonstrates that the developed reliability-based framework could potentially provide the practitioners of the public sector with a basis for developing effective preventative maintenance strategies with the aim of prolonging the service life of the PPP schools. Originality/value: Evaluating education PPPs is challenging as it involves long-term measurement of various service components under uncertainty. The developed reliability-based framework is a valuable tool to ensure that reliability is maintained throughout the service life of education PPPs in the presence of uncertainty