Risk Allocation in U.S. Public-Private Partnership Highway Project Contracts

Risk is often discussed in connection with public-private partnerships (P3s), and risk allocation is likely a determinant of P3 success or failure. Despite being central to the delineation and allocation of risks, contracts have not been used directly to examine risks in P3s, particularly in the United States. Employing a systematic content analysis framework, the allocation of 31 risks in 21 U.S. highway P3 contracts was determined. These contracts represent the entire population of U.S. highway P3 projects from 2004 through first quarter of 2016 with the exception of one project whose contract was not made available. The results were internally validated through interrater testing and externally validated using bond offering statements. Hence, the investigation is unique in its approach and comprehensive scope. The allocation results demonstrate that some risks were retained by the public sector, but the majority of the 31 risks were either transferred to the private sector or shared. The former outcome is not unexpected because risk transfer is generally viewed as fundamental to the P3 value proposition; however, the prevalence of sharing in the United States market is greater than that conveyed in the literature examining risk allocation in other large markets such as Australia and the United Kingdom. Risk sharing arrangements uncovered ranged from deductible schemes to event mechanisms with the latter employed quite frequently; hence, contract designers rely on ex post remedies to address risks once an event, such as a change in law, occurs. Parametric analysis did not reveal any dominant trends in risk allocation, but examination by the most active jurisdictions (Florida, Texas, and Virginia) and source of risk (exogenous versus endogenous) illustrated that project context influences risk allocation. While some consistency was found in the treatment of the 31 risks, the variation in allocation is further evidence that project-specific factors and environments will continue to challenge efforts to create uniformity in P3 contractual provisions. Additionally, with the U.S. P3 market still evolving, the results provide practitioners implementing P3s or considering their implementation a comprehensive overview of risk allocation practices and contractual language across a variety of project characteristics. Consequently, the results can inform practitioner decisions regarding risk allocation and contract design.