Demand risks drive up PPP defaults

There is a much higher failure rate among public-private partnerships that are based on non-availability payments – with 13.7% failing within 10 years, according to a study by Moody’s.

Public-private partnerships exposed to volume and price risks are six-and-a-half times more likely to default than those based on availability payments, an examination by Moody’s determined.

The study looked at more than 2,000 infrastructure projects, including 1,362 PPPs, dating from 1983 to 2015. It found that 13.7 percent of non-availability-payment-based PPPs defaulted within 10 years, while that number was just 2.1 percent for availability-based PPP projects. The overall 10-year default rate for PPPs during the 1983-2015 period stood at 5.6 percent.

“PPPs and other infrastructure projects that are exposed to demand risk show a higher marginal annual default rate than average,” said Moody’s vice president Kathrin Heiman, adding such projects “need to establish a longer operational track record before default risk subsides materially”.

The annual report noted stress in the Western European transportation PPP market, as this sector experienced most of 2015’s nine total defaults across the broad infrastructure finance space.

The cumulative 10-year default rate jumped from 4.9 percent in last year’s report to 5.8 percent. On PPP projects, this rate rose from 4.3 percent.

The study encompasses 62 percent of global project finance transactions over this period, according to Moody’s.