For instance, the demand by end users for a particular project may be less than what is originally projected—this is often referred to as “demand risk.” For motorway or railroad projects, there is always a great deal of uncertainty surrounding the degree to which the public will make use of additional transport infrastructure. Although part of the technical due diligence of any project will be an assessment of likely demand, it is impossible to predict with absolute certainty the actual demand by consumers once the project is operational. By contrast, demand for power generation in specific geographical areas tends to be more predictable, as current shortfalls and forecasts for increased energy consumption are often more readily apparent. Private parties to energy PPP agreements often mitigate against demand risk by insisting on guaranteed feed-in-tariff rates, or “take-or-pay” terms in the power purchase agreement.
In the concession model—which in Thailand is utilized in a number of sectors such as upstream petroleum production—the agreement allocates the majority of the risks and benefits of successful project implementation to the private entity. This generally includes complete assumption of the demand risk by the concessionaire. By contrast, when the PPP agreement takes the form of an operating and maintenance agreement, the demand risk remains with the public sector while the private entity acts mainly as a service contractor.
In comparison to these more extreme types of PPP arrangements, a “Design-Build” or “Design-Build-Operate” (DBO) model allows the public sector to maintain ownership over the project while allocating the design and construction tasks to a private entity. If the private sector entity is operating the project, it often does so in exchange for fixed fees while the public sector recoups its costs through pay-as-you-go fees from the public. The DBO is a common structure—though not the only structure available—in toll-road projects.
A “Build-Operate-Transfer” (BOT), “Build-Transfer-Operate” (BTO), or “Build-Operate-Own” (BOO) structure shifts ownership, either temporarily or indefinitely, to the private party. Along with the shift in ownership comes greater risk and the potential for greater rewards. The private partners in BOT or BOO contracts are generally responsible for financing the project development. Such structures are commonly used in greenfield power generation projects, particularly when the government or a state-owned entity acts as the off-taker.
According to a report released earlier this year by the ASEAN Secretariat, the Thai Department of Highways (DOH) has been considering the trade-offs between alternative PPP structures with respect to highway toll projects. The DOH is conscious that tolls collected by private investors under a BTO model may be insufficient to cover the costs of the project, and may therefore not be sufficiently attractive to the private sector. On the other hand, a DBO model, or a modification thereof, requires the government to assume a greater degree of risk in the event the highway is underused by the public.
There are other risks which a private investor must consider when bidding on a PPP contract. Political risk and regulatory risk often refer to the possibility of expropriation to the detriment of the private investor, or a change in regulations which would adversely affect the profitability of the private participant. It is difficult to completely mitigate this in the PPP agreement, since these risks are more fundamental to the host state’s capacity and willingness to promote private investment, particularly with regard to public infrastructure works. Thailand has been a model for a number of developing economies, as successive Thai governments have actively encouraged both private investment and PPP projects in general.
Additional risks include environmental risk, insurance risk, social risk, and exchange rate risk. These are only some of the factors which both public and private parties must consider when entering into PPP agreements. Since the public sector generally develops the contractual framework for a particular project prior to offering the tender, it will need to carefully consider which contractual form will best promote the public policy objective while attracting sufficient interest for private investment. Terms which allocate most risks to the private party may be unattractive in some situations, particularly where the rewards of successful project implementation cannot justify the assumption of such risks.
The use of PPPs by states to promote infrastructure development is increasing in popularity not only in Southeast Asia, but across the world. When properly executed, PPPs can be an efficient means to allocate state resources in order to promote economic growth and benefit the public at large. For private investors, the increased use of PPPs in Thailand represents an economic opportunity. Understanding the allocation of risk in PPP agreements and developing strategies to mitigate is a key component to a successful project.