Risks in Public-Private Partnerships

In the previous article, we have already seen that building stadiums where professional sports franchises operate is a very expensive and complex task. We have also seen that it is not profitable either for the private entity or the government entity to build such stadiums on their own. In such cases, the public-private partnership (PPP) model is considered to be appropriate. This is because the risks as well as rewards are spread out between the private and the public parties.

It is true that the public-private partnership (PPP) has some advantages over the other models. However, it would be quite inaccurate to say that there are no risks or concerns associated with the use of this model.

There are several risks that arise when the public-private partnership (PPP) model is used in order to build and operate stadiums. This article provides details about the various risks associated with such public-private partnerships.

1. Site Selection: Professional sports stadiums are generally successful when they are built on an appropriate site. Hence, site selection remains an important risk in the public-private partnership (PPP) model. This is because it is possible that the private party may end up choosing the wrong site and it may not be financially viable to build a stadium at the chosen site.

   Alternatively, it is also possible that the government may not be able to acquire the land or get the required permissions to build the stadium may take too much time. The cost of the project is likely to get immensely escalated in either case.

2. Insolvency: In the public-private partnership (PPP) model, the contract is executed between a government body and a private institution (sports franchise). It is also possible that there may be more than one private institution involved in the process, for example, a contractor.

   In any case, the financials of all the relevant parties are thoroughly checked before they are made a party to a contract. However, since these projects are executed over long periods of time, it is always possible that the financial situation of these companies may change.

   It is possible that one or more of these private parties or even the government body may go bankrupt. These are several municipal as well as other local bodies that have filed for bankruptcy in the recent past.

   It is also quite common for sporting franchises to run into cash flow troubles and then declare bankruptcy. Now, it is important to realize that the bankruptcy of any one party could mean that they are not able to discharge their responsibilities effectively. However, the impact of such a bankruptcy is not limited to the party declaring it.

   The ability of other parties to discharge their responsibilities effectively may be dependent upon the others. Hence, the bankruptcy or financial distress of a single party can trigger crisis-like situations.

3. Risk of Clearances: The construction of a stadium is dependent upon receiving several clearances. It is important for the project to be scheduled in such a way that the finances are raised and money is spent only after the clearances from airport authorities, the fire department, and the environment department are obtained. However, in real life, both the government as well as the private party try to start the work parallelly, this is done in order to save time.

   However, it is possible that the work may be stalled due to the paucity of such permissions and the inability to obtain them. If the private sector company has invested some money before such clearances are obtained, then it is likely that their money may end up being stuck for a long period of time or that they may even have to write off their investment.

4. Underutilization of Venue: The government as well as the private entities which enter into a public-private partnership (PPP) agreement plan their finances based on certain projections.

   In those projections, they have assumed a certain level of utilization of the stadium. Also, many stadiums try to build tourist attractions in their vicinity so that they can function as a standalone destination and there is some utilization of the resources on days when the sporting event is not taking place.

   If the number of event days gets reduced over the years, the result could be a significant loss of revenue. Such underutilization of revenue is a significant risk.

   Generally, in public-private partnership (PPP) model contracts, the government body tries to pass on these risks to the sporting franchise and it becomes the responsibility of the franchise to ensure a certain level of utilization. The private party is given some freedom with regard to the type of events that can be hosted at the venue so that they are able to mitigate this risk.

Hence, it can be said that the public-private partnership (PPP) model is also not free of risks. However, here the benefit is that the risks are distributed between the parties based on their ability to handle them. This allows the riskiness of the overall venture to be reduced to some extent. The end result is that the financial viability of the venture increases.