Bayesian technique framework for allocating demand risk between the public and private sector in PPP projects

Abstract

During a PPP (Public Private Partnership) project procurement, the private contractors priced the risk metrics and further negotiation has to be carried out until bother parties finally reach an agreement and sign the contract. The negotiations should consider whether the public sector should either accept the high risk cost, share the risks with the public sector, or retain the risk in the public sector. In the negotiation process, the decision of risk sharing is one of the most difficult task. When one party receives an offer (or counteroffer) from its opponent, he will analyses the offer, modifies its beliefs about the opponent and makes a counteroffer accordingly. The updated belief then becomes the agent's prior knowledge in the next updating process. An agent can finally get a relatively accurate belief about the opponent even if its initial domain knowledge is not so accurate. Both sides information is becoming clear once the negotiation goes further deeper. This paper adopted Bayesian updating techniques to provide a method for a new approach of risk allocation, which focusing how to distribute risk management responsibility between the public client and private contractor.