Unpacking the role of contextual factors in public support for mitigating revenue risk in public-private partnership projects

Revenue risk due to demand fluctuations is one of the major issues affecting public infrastructure projects (building bridges, airports, schools, etc.). It becomes much more critical when private partners have been involved in the construction, financing, and operation of the infrastructure projects, as it enters into the realm of Public-Private Partnerships (PPP). In PPP projects, revenue risk impacts the project profitability for the private investor. To attract private financing in PPP infrastructure projects, governments must frequently include supplementary public guarantees to mitigate this risk. However, the impact on PPP projects is often difficult to estimate, since it depends both on uncertainty and on the actual exercise of the guarantee. All these challenges, along with the intrinsic characteristic of PPP projects being partnerships among different actors lasting a long period, complicate the choice of which form of guarantee is more suitable for ensuring project success. Such a choice is also strongly affected by contextual factors and project characteristics. In this chapter, we employ the hybrid sensitivity-uncertainty analysis technique, Simulation Decomposition (SimDec), to investigate how contextual factors and project characteristics affect the choice of the optimal form of public subsidy for revenue risk mitigation. To this aim, we focus on the case of an Italian airport. Through this real case, we provide useful guidelines that can be used by the government in the selection of public subsidies to mitigate revenue risk in PPP projects.