City Link Toll Case Study
3.1 Risk allocation and the requirements of the various project stakeholders
PPP’s have many different stakeholders each with their own perspectives, objectives and requirements. The objective of the private sector is mostly to be profitable. The contractors want to make a profit from building infrastructure. The sponsor wants to see a return in the form of dividend on the money invested. Similarly, the lender charges interest on the loan in order to have a return. On the other hand, the public sector has several aims. Just as the private sector, aims can include making a profitable investment, but can also include a range of aims such as providing infrastructure services to the population, sometimes at an affordable price, …show more content…
(Williamson, 1976) Opportunistic behaviour can be manifested by contract renegotiation. This causes unnecessary costs and disputes, and causes the private sector to have more power. Contract renegotiation can come from contract incompleteness and information asymmetry. Information asymmetry issues arise because different parties don’t have access to full information, especially concerning the future.
The case study of the City Link Toll project in Melbourne as analysed by (Hodge, 2004), illustrates this point. The concession was for 54 years and the SPV was able to claim damages from the government because the latter was not allowed to take action which could damage toll way revenue. The vague contractual provision enabled the SPV to partake in opportunistic behaviour at the expense of the government. A concession period of 54 years means the state is in lock-in to the PPP and cannot initiate any similar projects in the surround area.
Contractual balance between the government and the private sector under PPP is difficult to achieve and this imbalance can be maximised by long concessions and vague provisions (Lonsdale, 2005). As private sector suppliers become dominant in those relationships, they are able to pass back risk and obtain greater …show more content…
Indeed, governments can become stuck in contracts which don’t allow flexibility, and can therefore incur costs.
Furthermore, the effect of contractual disputes of renegotiation is different for a government than on a private company. A legal dispute about the government and a PPP is a good newspaper story. Therefore, a government ‘might settle for terms that restrict its future control and threaten its sovereign position’ (Issa, Emsley, & Kirkham, 2012, p. 1223)
The connection between the stakeholder’s various objectives and perspectives and the risk allocation process has been explored. It can be concluded that the risk allocation process is complicated by each party’s incentives. Some stakeholders have more power in the negotiations, or have more to lose should the project fail. The government holds a difficult position; it can have an impact on project success but also risks being prone to opportunistic behaviour. Finally, there is a trade-off between ensuring contracts are as complete as possible and the government losing flexibility and being effectively