Research Of Risk Allocation System For PPP/BOT Projects Based On Information Cost

Public-Private Partnerships (PPP) is one of the agreements where public sector bodies enter into long-term contractual agreements with private entities for the construction of public entities infrastructure facilities by the private entity, which has been used widely in the world. Risk management is a key factor to the success of a PPP/BOT project. The allocation of risks is a strategic arrangement to the risk management, the benefit of all the stakeholders are deeply influenced by it. However, the present research focuses on the Model or statistics conclusion, explanation of systems is kind of ignored. The paper believes that the reason why the present system goes is the key point to solve that problem.The paper surveyed and got the reality how the allocation is approached in the real-world. Risks are allocated by two different agreement styles, assuming the risk by one side or share it between each other. Then the paper proposed a hypothesis based on the information cost angle. In the process of allocation, information cost is the main cost to reach an agreement, if both sides have to pay a high information cost to get the risk information, then it is hard to allocate it to any of the side, in this way, they would share it together, cause it is an arrangement which would reduce the transaction cost, on the other hand, if a specific risk is not shared, neither of the two sides would have to pay a high cost, in other words, there must be one side which could get the information at a lower cost. This paper finally demonstrated the hypothesis with two milestone PPP/BOT projects in China mainland..In this paper, a more reasonable risk allocation principle as well as a framework for risk allocation accordingly was proposed, which could serve as practical guidelines for public and private sectors during PPP project negotiation.. The paper proposed a hypothesis to explain the risk allocation in real world, if both sides have to pay a high information cost to get the risk information, they would share it together, if the risk is not shared, there must be one side which could get the information with lower cost.