The Role Analysis for the Shareholding Structure to Risk Control in Public–
Private Partnerships
Xing Bi1, Jing-xing Chang1
1
College of Management and Economics, Tianjin University, Tianjin, China
(bistar@126.com)
II. METHODOLOGY
Abstract - The PPP (Public-Private Partnership) model
has become increasingly important as a means of financing
the construction of infrastructure, but it has many special
characteristics, such as a large investment, long construction
period, involving many partners, and the complex contract
structure relatively. This makes the project risk control
extremely important, which also is the key to success.
Through a detailed literature analysis, first of all, the paper
points out the main points of risk control with twodimensional analysis of the risk, and determined both public
and private risk allocation coefficient according to the equity
structure, and then the control was given the most
advantageous risk control side according to the shareholding
structure adjusted, in order to achieve the new ideas for the
purposes of risk control.
Keywords – PPP, risk control, ownership structure
I.
INTRODUCTION
PPP (Public-Private Partnership) is a way of
supplying Public products, which between outsourcing
and privatization and combines both those characteristics,
which makes full use of private resources for the design,
construction, investment, operation and maintenance of
public infrastructure, and provides related services to
meet public demand [1].
PPP Project financing allows private capital to become
more involved in the project. Considered the
government's public sector and private sector concession
agreement as the basis for the full cooperation, both sides
are responsible for the entire cycle of operation of the
project to improve efficiency and reduce risk. But
generally the PPP project requires a large investment and
long time, faced with high-risk. The contract structure is
relatively complex and the project negotiation process is
often protracted [2]. There is often a controversy, as a
result of being unable to deliver on promises in the
implementation process or some other reason, so that only
a small number of PPP projects can operate normally in
practice among them. The main reason is the lack of fair
and reasonable risk-sharing between public and private
sector standards and it is difficult to drive both sides
industriously to control risk allocated [3]. Consensuses on
the principle of risk allocation have been reached [4], but
the concrete implementation of the risk incentives and
risk-control is still an urgent problem in the PPP project.
A.
Two-dimensional analysis for risk
Relative to the general project, the PPP project with
long construction period, involving the public sector,
private sector, the project company, bank financial
institutions,
insurance
companies,
engineering
construction,
contractors,
engineering
consulting
companies, suppliers of equipment and materials, the
project products (services) buyers and many other parties,
and the contractual relationship between the parties is
more complicated[5].
This will undoubtedly increase the risk of the project,
which has brought many challenges to the smooth
implementation of the project. Project risk control has
become a bottleneck in the development of the PPP mode.
Good risk control stems from a clear understanding of risk
[6]. For risk control study, the paper analyses the project
risk from the two dimensions including the project stage
and the type in-depth to lay the foundation.
From the view of project process, the risk exists in the
whole process and stages of the project. General project is
divided into seven stages: feasibility study stage, bidding
stage, the organizational phase of the contract, financing
stage, the project construction phase, the project operation
phase and the project transition phase. In this paper, the
first three stages are collectively referred to the project
early stage. The different stages have different risk
characteristics and risk control points [7].
According to risk types, the risk also is divided into
political risk, construction risk, operational risk, market
risk, legal risk and financial risk [8].
Two points method are not independent each other
with a different classified way of the same risk (see
Fig.1). Each risk does not just exist at a certain stage;
every stage does not just have a type of risk. Such as: the
rising risk of market risk in the cost of materials present in
the construction phase, but the market demand, the only
competition in the market risk does exist in the phase of
the operation. Meanwhile, the same stage of construction
is not only market risk, but political, financial and other
risks. These two division methods benefit from the
perspective of two-dimensional understanding of risk,
which can identify the main risks of the various stages
and the generic of risk at this stage. Thereby increasing
the sense of three-dimensional understanding of the risks,
which contribute to more clearly identify who have more
advantages to control risk in order to better allocate and
control risk [9].
Early stage
Political
Financing stage
Construction
Project construction
Operation
Market
Operation phase
Legal
Transition
phase
Financial
Fig.1. Two-dimensional analysis for risk
The complexity of the risk we can not only singly
control a certain stage, but also do with the type of risk,
analysis of both the sources of risk, and thus determine
the risk control methods. How to achieve effective control
is the focus of this study.
B. Risk allocation principles
For the principle of risk allocation of the project
academia has reached a consensus [10]: who have the best
power to the risk to bear the corresponding risk. Thus,
when the risk occurs, we first determine the stage of the
risk and generic the risk of, determine who control this
risk, which means who in the best position will reduce the
probability of the occurrence of the risk and the losses
caused. Meanwhile, who have the power to control risk
would be derived him to manage the risk industriously. In
accordance with the principles on the allocation of these
risks, construction risks should be allocated to the private
sector because the private sector in the best position to
control the construction process of the project; some risks,
such as political risk, the risk of legal changes and
nationalization risk, should to be beard by the public
sector with more control. Because the public sector, as a
government or government representatives, has the ability
to influence the rules and regulations, policies, laws and
other regulations. Therefore, it is in a more favorable
position than the private sector to identify, evaluate and
control these risks.
III. DISCUSSION
A. The impact of ownership structure on risk allocation
Reasonable risk allocation principles, the most
favorable control side of the risk needs control power that
matches the risk and the proceeds corresponds to risk to
excited its risk control initiatively. Control and equity are
inseparable. The project company's ownership structure or
investment structure reflects the shareholders 'legal rights
to interests of the project assets and legal contractual
relationship between the shareholders each other. Under
the constraints of the project site laws and regulations,
accounting and tax and other objective factors, it is one of
ownership structure of assets of projects to achieve the
shareholders' investment objectives [11]. How much
equity represents how much control, and it also represents
a party to the risk control ability.
This paper tries to discuss the risk control from the
ownership structure perspective. First before the start of
project, both public and private determine their own risk
allocation through particular negotiations. Generally, the
risk which is able to identify which side is more
advantage to control is borne by the appropriate parties,
the one, which is difficult to identify which side is more
advantages to control or both sides do not have the
advantage of risk control, should be allocated in
accordance with the accounting for interests in shares by
the two sides. Then the risks borne by the private party
can be divided, and generally private parties are
composed by the Joint Venture, each participating
enterprise have professional advantage at one stage.
Giving it control power by reasonable adjustments of the
ownership structure in the course of the project, so as to
achieve the incentive to fully play their own advantages to
control the risk(see Fig.2).
Under the guidance of the principle of risk allocation,
the problem of the risk allocation becomes to distinguish
who have more control power to risk. Found by
comparison: 1) the private party shall bear the risk of
project financing, construction, procurement, operation
and maintenance; 2) The Government should undertake
public policy, law changes and other risks; 3) force
majeure risk which is not good to determine which side to
take the risk, should be a mutual undertaking. We set the
risk distribution coefficients A, B, C, and A + B + C = 1.
A represents the risk distribution coefficient of the
Government, B represents the risk distribution coefficient
of the Government, C represents the risk of both the
government and the private side shared. C sector would
redistribute according to the ownership structure of the
entire project. If private parties invested in M, and
government-funded N, the private party equity accounted
for K = M / (N + M), then 1-K for the government. The
ultimate risk of the partition coefficient of the private side
is X1 = A + K * C, for government departments, the
allocation of risk factor is X2 = B + (1-k) * C. Then the
allocation coefficient of risk are linked to final income
with the project, the more coefficient and more higher
income distribution in order to achieve the purpose of
incentives to control risk.
Total risk
The first distribution
The risk of government control
The second distribution
The risk of private control
A Company
B Company
C Company
Fig.2. Risk allocation flow
B. Private party risk redistribution
Through the allocation of these risks, the private
parties determine the risk of their own to bear. The private
party is a coalition of several enterprises generally in the
PPP project, each one has its own expertise areas, and
general project has Stage characteristic of financing,
construction and operational phases. The implementation
of project will benefit from professional advantage.
Faruqi and Smit think that sharing the PPP project
company with contractors and equipment suppliers and
other professional firms will benefit the project on
schedule, completion of standard quality to achieve
business, give full play to the already existing experience
in the actual operation and improve operational efficiency
[12]. Zhang points out that the construction and finance
are two risk types of PPP projects, the government and the
creditors are very concerned about the project shareholder
structure, and that the shareholders who tend to achieve
profit-sharing of project is to be more conducive to the
implementation of the project [13]. Yescombe think that it
will effectively reduce the financing costs, improve
financing efficiency that the cooperation between the dual
identity of investors for short-term interest, such as the
construction contractors, equipment suppliers, and those
pure investor who are interesting in long-term benefits of
the project [14]. Xu Xiaodong and the Chen Xiaoyue
points out that the changes in the company's largest
shareholder is in order to obtain the benefits of control,
It is conducive to the improvement of the
effectiveness of corporate governance, enlarged scale and
more specialized management [15].
Combining of existing research results, the advantages
of company shares will play their strengths to control
projects risk in the stage of financing, construction and
operation, reduce risk probability and ensure the
successful implementation of the project. To this end, it is
a good way that can be taken to encourage private
consortium enterprises by restructuring equity structure
according to the process of the project.
Assuming that the private joint venture contains
investment management company (A), Construction
Company (B) and operating companies (C), every
company has the different proportion of equity in
different stages of the project. Company keeps the
absolute ownership (shareholding> 50%) in its best
control stage, meanwhile, and the distribution of income
is directly related to the equity proportion in order to
motivate the purpose of risk control. Specific actions:
firstly, A keeps the concentrated ownership in the
financing stages in order to reduce higher financing costs
risks. For the construction phase, the ownership is
concentrated hold by the Company B, using its own
experience and technological advantages to control
construction costs, completion date, quality of the project
and other risks in the field of construction. Finally to the
operational phase, the ownership is concentrated hold by
the Company C which has the most advantage to control
risk at this stage. The entire equity interest in the
conversion process could be the associates within the
body of equity transfer agreement (see Fig.3).
Financing stage
Project stage
A>50%
B<50%
C<50%
A<50%
B>50%
C<50%
Operation stage
A<50%
B=0
C>50%
Fig.3. Make the ownership structure adjustment according to the stage of project
REFERENCES
IV. CONCLUSION
PPP project model can effectively reduce the burden
on public finances to optimize the fiscal expenditure
configuration, the introduction of advanced technology
and management experience, and improve efficiency.
There is a wide range of applications, covering the field of
transportation, power plants, water supply, sewage / waste
disposal, medical, national defense, prisons and police.
However its risk control issues become more prominent
than the average one, which has become the bottleneck in
the development of PPP projects. Starting from the twodimensional analysis of risk, the paper raises both public
and private to accept risk which mainly be allocated in
accordance with the division of the types of risks, every
company of the private parties bear the risk of secondary
distribution which is to be allocated in accordance with
the project process. Combining equity restructuring and
risk allocation, there is to incentives and give the most
advantage risk controlling party absolute control power in
order to achieve the best risk control purposes.
ACKNOWLEDGMENT
Thank seriously the teachings of my mentor,
Associate Professor Xing Bi. I am deeply affected by his
meticulous scholarship and concentrated study of the
academic attitudes, from which I benefited more.
Meanwhile, I am also like to thank my senior younger
brothers, who give me the happiness to study.
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