Privatization Financing Alternatives: Blending Private Capital and Public Resources for a Successful Project
The U.S. Department of Energy (DOE) launched the Contract Reform Initiative in 1994 in order to improve the effectiveness and effkiency of managing major projects and programs. The intent of this initiative is to help DOE harness both technical and market forces to reduce the overall cost of accomplishing DOE's program goals. The new approach transfers greater risk to private contractors in order to develop incentives that align contractor performance with DOE's objectives. In some cases, this goal can be achieved through public-private partnerships wherein the govermhent and the contractor share risks associated with a project in a way that optimizes its economics. Generally, this requires that project risks are allocated to the party best equipped to manage and/or underwrite them. While the merits of privatization are well documented, the question of how privatized services should be financed is often debated. Given the cost of private sector equity and debt, it is difficult to ignore the lure of the government's "risk free" cost of capital. However, the source of financing for a project is an integral part of its overall risk allocation, and therefore, participation by the government as a financing source could alter the allocation of risks in the project, diminishing the incentive structure. Since the government's participation in the project's financing often can be a requirement for financial feasibility, the dilemma of structuring a role for the government without undermining the success of the project is a common and difficult challenge faced by policymakers around the world. However, before reverting to a traditional procurement approach where the government enters into a cost-plus risk profile, the government should exhaust all options that keep the private entity at risk for important aspects of the project. Government participation in a project can include a broad range of options and can be applied with precision to bridge a gap in the project's financial structure. As a general rule, the method and magnitude of this participation should depend on the unique requirements of the project and should serve to enhance the ability to raise private financing and lower overall project cost to the government. In order to properly evaluate the available options, it is important first to define the government's objectives in the project. The government then needs to analyze and determine the risk allocation structure, including the appropriate mix of private and government financing, which maximizes the project's efficiency and still allows the project to proceed in a way that meets the government's objectives for privatization.
- Research Organization:
- Pacific Northwest National Laboratory, Richland, WA
- Sponsoring Organization:
- USDOE
- DOE Contract Number:
- AC06-76RL01830
- OSTI ID:
- 938
- Report Number(s):
- PNNL-11916; R&D Project: Overhead; ON: DE00000938
- Country of Publication:
- United States
- Language:
- English
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