Risk Management in Transport PPP Projects

In the Islamic Countries

recession in a globalized economy is likely to affect the performance of PPPs throughout

the investment life-cycle

, affecting both ongoing and planned PPP operations. Since generally

deep and long-lasting recessions are not addressed in contractual structures, steps to alleviate

the consequences of such recessions are likely to involve the combination of both robust ex-ante

risk management systems and ad-hoc governmental support and mitigation measures.

This is illustrated by a 2009 IMF working paper

explaining how the transmission of impacts

takes place through multiple channels and affects different stakeholders, notably governments

and private parties, impacting on their economic accounts and balance sheets and exacerbating

real economy and financial vulnerabilities.

The IMF lists various measures public stakeholders can consider in order to alleviate the

negative impacts of a deep recession, bearing in mind how they can affect PPPs at different

points in their development, namely at the identification, preparation, construction and

operation phases. Measures considered are mostly destined to support project cash-flows

negatively affected by the adverse event and reduce the exposure of the private parties. They

range from the extension of the concession duration, various forms of subsidy or tax exemption,

capital grants lowering construction costs, minimum revenue guarantees, exchange rate

guarantees, various forms of guarantee supporting debt repayment capacity or possibly

minimum remuneration for equity investors. Finally, the public party could consider the

possibility of exercising step-in rights, taking over or re-tendering the concession.

It should be noted that all these measures have a cost for the public sector and that the

convenience of the various options needs to be carefully considered. It is also recommended that

these measures should be structured as forms of temporary support and contain contingency

clauses, so that they cease to be effective once the emergency situation is over and risk-return

conditions for private parties improve.

Burger P., Tyson J., Karpowicz I., Delgado Coelho M. (2009). “The Effects of the Financial Crisis on Public-

Private Partnerships”, IMF Fiscal Affairs Department, Working Paper 09/144.