Risk allocation in privately financed projects

Privately financed projects (PFPs) are characterized by complex risk allocation that includes both qualitative issues (what type of risk is allocated to whom) as well as quantitative issues (how much of the risk is allocated). While many existing studies have focused on qualitative issues with empirical and descriptive approaches, few studies have yet focused on quantitative issues in the field of construction economics and management. This research, focusing on quantitative issues, examined risk allocation in PFPs by developing a quantitative model within theories of rational decision-making. Focusing on the effect of the magnitude of the risk allocated to stakeholders, a theoretical model was developed, which incorporates stakeholders' attitude and assessment to the risk associated with PFPs between the two key participants, the government client and the private participant. By linking the risk allocation problem in PFPs to insurance theory, the model made it possible to analyse and understand risk allocation in PFPs within a theoretical framework of rational decision-making. Incorporating bounded rationality in interactive decision-making, the model provided a framework of negotiation analysis that focuses on the negotiation space rather than on specific solutions. Key results from analysis using the developed model are as follows. The investigation on the change in stakeholders' risk attitude and risk assessment revealed that (1) the stakeholders may become contradictory in revealing information before and during the negotiation and that (2) the expected rate of return is not an appropriate indicator of evaluating project viability without consideration of risk. The investigation on the uncertainty about each stakeholder's information revealed that, when at least one stakeholder is uncertain about the other stakeholder's Information, (1) both stakeholders would be worse off in risk allocation negotiations and (2) cooperative 'win-win' deals would become unachievable. It also showed that (3) risk allocation strategy taken by one stakeholder would become opposite to that taken by the other stakeholder when both stakeholders are uncertain about the other stakeholder's information. This thesis provided different framework and perspective in understanding risk allocation in PFPs from those provided by empirical and descriptive approaches commonly applied in the field of construction economics and management.