Financial Analysis of Risk-Reallocation in PPP projects: focusing on the Transactions between Private Investors in Korea

Abstract

In last decades, project private partnerships (PPP) projects have been provided as solutions to reduce the governments financial burdens by encouraging private sector participation. The use of PPPs to build and operate infrastructure, such as roads, has been increasing in many countries worldwide. Due to the large project scale, long concession period, complexity, and social sensitivity, the risk-allocation between public sector and private sector is important for both parties to achieve a more efficient and profitable process during the concession period. Particularly, as the private sector investors aim to earn profits, the evaluation of the financial viability from the risk-allocation is very important for the stakeholders. In recent times, private sector allocates the risk between private sector investors in terms of equity transaction and agreement transaction, after the abolishment of minimum revenue guarantee (MRG) which is the risk allocation agreement with the public sector in Korea. Especially, the additional risk-allocation have made the cash flows of private sector investors fluctuated and some of the PPP projects delayed. Therefore, analyzing the impact of risk reallocation between private sector investors on their cash flows is the critical for encouraging the private sector participants. Although existing financial viability analysis models have considered risk-allocation in PPP projects, equity transaction and agreements transaction between private sector investors are not fully reflected in the models. However, It is difficult to understanding the fluctuation of private investors cash flows in recent projects because previous models have focused on the transaction and agreement in PPP primary market from SPCs point of view. Therefore, the purpose of this research is to analyze the impact of risk-reallocation between private investors by developing the financial analysis model which considers the equity and agreements transaction in the PPP secondary market. In this research, frameworks have established for identifying how the transactions affect private investors financial performance through reviews on recent PPP projects in Korea, and integrated research model that captures the impact of equity and agreement transaction on cash flows constructed by using Discounted Cash Flow (DCF) model. Based on this, the linkage between transaction and investors return on investment (ROI) have verified based on empirical analysis. This research can be used to better understand the impact of risk-reallocation on private investors expected rate of returns, and the main contribution is that participants willing to invest in PPP projects can determine which strategy offers a superior performance.