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How Do Credit Spreads Affect Risk Allocation In Public Ï¿½ Private Partnerships?

Author

Listed:
  • Carlos CONTRERAS

    (Universidad Complutense de Madrid, Department of Applied Economics VI, jc.contreras@ccee.ucm.es, Madrid, Spain,)

  • Julio ANGULO

    (International Center for Infrastructure Solutions, Quantitative Analysis, ja@grupoicis.com, Madrid, Spain,)

Abstract

The impact of funding cost is an important dimension in the design of risk allocation in public�private partnerships (PPP), given the relevant leverage of project financing. However, the academic literature has paid little attention to this issue. The aim of this paper is to measure to what extent a higher cost of funding affect the choice of risk transfer by grantor governments. During the Great Recession, developing PPPs with market risk was a difficult task and high credit spreads were applied to project finance loans. This paper analyzes the optimal risk allocation in a PPP by using two models in which the government has the option to transfer availability risk or demand risk to a private partner. The paper finds that the credit spreads of project finance loans significantly affect the decisions on which type of risk should be transferred to private-sector parties when governments use PPPs.

Suggested Citation

  • Carlos CONTRERAS & Julio ANGULO, 2016. "How Do Credit Spreads Affect Risk Allocation In Public Ï¿½ Private Partnerships?," Journal of Public Administration, Finance and Law, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 9(9), pages 63-79, June.
    • Handle: RePEc:aic:jopafl:y:2016:v:9:p:63-79
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    References listed on IDEAS

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    Cited by:

    1. Hartman, Paul & Ogden, Jeff & Jackson, Ross, 2020. "Contract duration: Barrier or bridge to successful public-private partnerships?," Technology in Society, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Availability risk; Demand risk; Risk allocation; Credit spread; Project finance; Public�private partnership;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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