Risk allocation, transaction cost economics and PPP

In this chapter, we will take a close look at the current or traditional risk allocation in construction and, in particular, PPP projects. We will examine the risk allocation practice in three Australian PPP projects based on the principles of optimal risk allocation. The weaknesses of the traditional risk allocation practices, which are mainly (organizational) risk management (RM) capability-oriented, will thus be highlighted. We will later make the case for the necessity of tackling risk allocation decision making (RADM) from a perspective of transaction cost economics (TCE) augmented with organizational capability (in particular resource-based view (RBV)). It is because TCE integrates economics, organization theory, contract law and behavioural assumptions in an interdisciplinary framework of organizational phenomena and takes account of the role of transaction costs and informational issues that the self-interested economic agent faces, that we claim and adopt the TCE plus RBV approach as one suitable to the study of risk allocation. After a brief introduction to the TCE theories, we will discuss and analyse the risk allocation decision-making process from the perspective of TCE. From a TCE perspective, the RADM process could actually be viewed as the process of deciding the proportion of risk management responsibility between internal and external organizations (i.e. public and private partners in PPP projects) based on a series of characteristics of the risk management service transaction in question. Finally, this chapter is concluded with recommendations for further study on risk allocation in PPP projects using TCE.