Construction Risk in Infrastructure Project Finance

Summary:

We know from the project management literature that construction risk is significant in public infrastructure projects delivered through traditional procurement methods. We also know that, when similar projects are procured using project financing, construction risk is passed on through date-certain, fixed price contracts. However, there is, to our knowledge, no available empirical research on the significance of construction risk once it has been passed on. Using a dataset of ex ante and ex post construction costs in infrastructure project finance, we find, with a high degree of statistical significance that construction risk in infrastructure project finance is wellmanaged and that expected cost overruns should be zero, while project specific risk is completely idiosyncratic and therefore diversifiable from the point of view of the SPE (i.e. investors in infrastructure projects). We also find, with a high degree of statistical significance that the construction risk to which the private sponsor is exposed in infrastructure project finance is different from that to which the public sector sponsor is exposed in traditional infrastructure procurement.