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- 3 Marks
Question
Public-Private Partnership (PPP) has become a major vehicle through which the government is leveraging private resources and technology in the provision of public services. However, PPP could become a vehicle for plunging public resources and taking public services out of reach of ordinary citizens. This concern has led to the creation of National PPP policy that provides a framework for effective PPP arrangements.
Required:
Identify TWO financial risks in PPP arrangements.
Answer
The two financial risks in Public-Private Partnership (PPP) arrangements are:
- Failure to Obtain Funding:
There is a risk that the entity or the private partner may fail to secure the necessary funding for the project. This could occur due to the entity’s credit status, debt limitations, or investors’ perceptions of the risks involved in the project, leading to delays or project cancellation. - Rising Interest Rate Risk:
Another significant risk is the potential for rising interest rates, particularly if the debt secured for the PPP project is in foreign currency. Fluctuations in interest rates can increase the cost of borrowing, making the project more expensive and potentially leading to financial strain on both the public and private partners. - Inflation and Exchange Rate Risk:
Inflation and exchange rate fluctuations can pose challenges, especially in projects where costs are denominated in foreign currencies. Hyperinflation or a significant depreciation of the local currency could increase the project’s costs, making it less financially viable and putting pressure on the public finances.
- Tags: Financial Risks, Public Sector Finance, Public-Private Partnerships
- Level: Level 2
- Topic: Public Procurement
- Series: MAY 2018
- Uploader: Theophilus