Assessing contingent liabilities in public-private partnerships (PPPs)
Emmanouil Sfakianakis & Mindel van de Laar
#2012-030
Public-private partnerships (PPPs) can impose important future cost on
the government, which in turn create obligations similar to public debt
obligations for financing infrastructure investment. Apart from that,
government guarantees, typical in PPP contracts, constitute explicit
contingent liabilities. The risk that arises from such guarantees must
be transparently valued to assess a country's fiscal profile. In this
study, we aim to show that the notion of a PPP as a (set of) contingent
claim(s) can also be used to value the PPP public risk. Valuing
contingent claims in this manner is important, as it allows us to
compare more carefully different set-ups of a PPP. We introduce and
analyse the different scenarios that were at the Chilean government's
disposal for executing a transport infrastructure project. Our findings
reveal that, for the first years of a PPP programme, the burden on the
surplus or deficit will be less in the case of the PPP compared to
typical public investment. Secondly, the net contingent PPP flows
constitute the real effect on the deficit and correspondingly on the
public debt and weaken the government's fiscal stance. Finally, we
attribute a specific price to the PPP public risk introducing CDS
valuation with and without counterparty (government) default.
Keywords: PPP, Guarantees, Public Finance, CDS valuation
JEL classification: H40