Privatization Financing Alternatives: Blending Private Capital and Public Resources for a Successful Project
The U.S. Department of Energy (DOE) launched the Contract Reform Initiative in 1994 in orderto improve the effectiveness and effkiency of managing major projects and programs. The intent ofthis initiative is to help DOE harness both technical and market forces to reduce the overall cost ofaccomplishing DOE's program goals. The new approach transfers greater risk to private contractors inorder to develop incentives that align contractor performance with DOE's objectives. In some cases, thisgoal can be achieved through public-private partnerships wherein the govermhent and the contractor sharerisks associated with a project in a way that optimizes its economics. Generally, this requires that projectrisks are allocated to the party best equipped to manage and/or underwrite them.While the merits of privatization are well documented, the question of how privatized services shouldbe financed is often debated. Given the cost of private sector equity and debt, it is difficult to ignore thelure of the government's "risk free" cost of capital. However, the source of financing for a project is anintegral part of its overall risk allocation, and therefore, participation by the government as a financingsource could alter the allocation of risks in the project, diminishing the incentive structure. Since thegovernment's participation in the project's financing often can be a requirement for financial feasibility,the dilemma of structuring a role for the government without undermining the success of the project is acommon and difficult challenge faced by policymakers around the world. However, before reverting to atraditional procurement approach where the government enters into a cost-plus risk profile, the governmentshould exhaust all options that keep the private entity at risk for important aspects of the project.Government participation in a project can include a broad range of options and can be applied withprecision to bridge a gap in the project's financial structure. As a general rule, the method and magnitudeof this participation should depend on the unique requirements of the project and should serve to enhancethe ability to raise private financing and lower overall project cost to the government. In order to properlyevaluate the available options, it is important first to define the government's objectives in the project. Thegovernment then needs to analyze and determine the risk allocation structure, including the appropriatemix of private and government financing, which maximizes the project's efficiency and still allows theproject to proceed in a way that meets the government's objectives for privatization.
Year of publication: |
2009-11-04
|
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Authors: | BT Oakley ; JH Holbrook ; L Scully ; MR Weimar ; PK Kearns ; R DiPrinzio |
Subject: | energy planning and policy | Contractors | Hanford Reservation | Management |
Saved in:
freely available
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