Determinants of Efficient Risk Allocation in Privately Financed Public Infrastructure Projects in Australia

Abstract

Risk allocation in privately financed public infrastructure projects, which are mainly referred to as public-private partnership (PPP) projects, is a challenging job due to the nature of incomplete contracting. An investigation into the mechanism that guides the formation of efficient risk allocation strategies is thus desirable. Drawing on the transaction cost economics and resource-based view of organizational capability, this paper has identified five main features of the transactions associated with risk allocation in PPP projects. They include partners’ risk management routine, partners’ risk management mechanism, partners’ cooperation history, risk management environmental uncertainty, and partners’ risk management commitment. For achieving cost efficiency, different risk allocation strategies may suit different conditions of the features. Accordingly, a theoretical framework and five hypotheses were proposed for testing. Data collected in an industrywide survey were analyzed using multiple linear regression technique. It was found that generally, the identified features are determinants in the decision-making process of efficient risk allocation. Therefore, the proposed theoretical framework provides both government and private agencies with not only a logical and holistic understanding of but also a support tool for decision making on risk allocation strategy in PPP projects. Study limitations and future research directions are also set out.