Perception of Residual Value Risk in Public Private Partnership Projects: Critical Review

Abstract

Given the increased demand for public facilities and the lack of funds and skills to maintain, repair, and replenish the existing facilities, public private partnerships (PPPs) have been widely adopted and have significantly contributed to the development of new infrastructure built throughout the world. However, because many PPP projects will be transferred back to the host governments upon expiry of the concession period, problems related to the subsequent management of PPP projects have not yet been thoroughly studied. Residual value risk (RVR) is a critical concern when the projects revert back to the public sector. Through an extensive literature review and an open-ended questionnaire survey, the perception of RVR in PPP projects is elaborated in this paper, which aims to present a precise definition and meaning of RVR in PPP projects. The survey results indicate that RVR is viewed as an important concern by professionals and academics. The definition of RVR can be phrased as the risk that on expiry or earlier termination of the service contract, the asset (tangible or intangible) is not in accordance with the value originally estimated by the government at which point the private party agreed to transfer it to the government; as a result, public sectors may suffer the loss of the residual value, and the private sector partner may also suffer the loss of compensation from the government owing to a different residual value. Six critical risk factors leading to RVR are identified in this paper: (1) downfall of product or service performance; (2) functional problems; (3) decrease of profitability and low possibility of refinancing; (4) deterioration of maintainability; (5) decline in operability; (6) failure of sustainability. On the basis of the proposed RVR model, the cumulative effects of the interaction of different risk factors are identified. The proposed RVR definition and its associated RVR risk factors in PPP projects can be considered for use by the public sector to better regulate and manage PPP projects and to facilitate the development of PPP projects from the perspectives of regulatory and financial planning.