IRR in Public-Private Partnerships : Case study: Project IRR of four PPP companies in Finnish infrastructure procurements

Infrastructure undertakings have been heavily criticised worldwide and in Finland. The main reasons for the criticism is that these often have budget and time overruns. A possible solution to this is the use of private financing in procurements, or more precisely Public-Private Partnerships. These types of procurements are run by Special Purpose Vehicles, which are private consortiums founded merely for the specific PPP. These consortiums seek as other private companies return on their investments. Compared to traditional procurements, PPPs have high financing costs, since the private companies involved want sufficient return on their contributions. This means that public funds are used to finance returns in private companies, and the question arises if this is reasonable from the view of taxpayers. The purpose of the thesis is therefore, to research how much the public sector has paid to use PPPs as procurement methods. The purpose more specifically is attempting to answer how much more is paid for PPPs, compared to if traditional procurements were chosen instead. This is done by calculating 4 different Finnish PPP companies' returns by calculating their IRR. Since the purpose is to attempt to answer how much excess is paid for the PPP option, an additional question arises about if the excess paid is reasonable. The results of the computations show that estimated Project IRR in the Finnish procurements is on average 5.95%, with the excess return yearly being on average 2.72%. Compared to a previous study by Fernandes et al. (2016), this excess return is lower. If budget and time overruns between 17-77% and other benefits of PPPs are taken into consideration, this excess return can be seen as reasonable. The main reason being, that there is a possibility that due to budget optimism traditional procurements could cost in the end more and that due to budget constraints in the public sector, these procurements would have not been built, since resources were not enough