An Introduction to Risk Management in PPP Projects

An Introduction to Risk Management in PPP Projects Claire Donald 25 September 2008 © Shepherd and Wedderburn LLP

Introduction - Summary ● Identification and analysis of risk ● Allocation of risk ● Documentation or risk ● Management of public sector risks ● Management of private sector risks 25 September 2008 2

Introduction – PPP and Risk ● Why do we care about risk in PPP? – Justification of use of PPP – Off – balance sheet treatment? – Government approval – Getting “more” for increased capital cost 25 September 2008 3

Introduction – PPP and Risk ● Feasibility study/business case – Step 1 - decision that capital investment is required – Step 2 - identify options – Step 3 - select preferred option ● Selecting preferred option includes – Analysis of risk – Public sector comparator 25 September 2008 4

Identification and Analysis of Risk ● What is risk? – “A chance or possibility of danger, loss or injury” (Oxford English Dictionary) – “Exposure to the consequences of uncertainty” (Wikepedia!) ● Factors – the event – the likelihood of it happening – the impact if it happens 25 September 2008 5

Allocation of Risk ● Allocate to party best placed to manage risk, BUT: - – maintain value for money – maintain marketability of project ● standard risk allocations such as – Standardisation of PFI Contracts (Version 4) (UK) – NHS Standard Form (English and Scottish version) – Scottish Standard Schools Contract 25 September 2008 6

Allocation of Risk ● Project specific risks – Should standard allocation be changed? – Does a new allocation need to be created? – Should the risk be shared? 25 September 2008 7

Documentation of Risk ● The contract package – allocates the risk – provides mechanisms to incentive risk management ● Mechanisms (Private Sector) – no payment until delivery – payment mechanism/deductions – termination ● Mechanisms (Public Sector) – compensation events – change mechanism – termination 25 September 2008 8

Public Sector Risk Management Project Risks Authority Retained Risks Project Company 25 September 2008 9

Public Sector Risk Management ● Retained risks – – – understand them minimise them allocate contingency insure them manage them 25 September 2008 10

Private Sector Risk Management Transferred Risks Project Company Construction Contractor Facilities Management Contractor Retained Risks Lifecylce Contractor 25 September 2008 11

Private Sector Risk Management ● Passed down risks – Check financial covenant of sub-contractors – Ensure sub-contract is marketable ● Retained risks – – – minimise them allocate contingency insure them manage them technical diligence? cap exposure 25 September 2008 12

Conclusion ● Key Point – Preparation! – Understand the project risks – Take care in allocating them – Have a process for managing them 25 September 2008 13

Contact Details Claire Donald 1 Exchange Crescent Conference Square Edinburgh EH 3 8 UL T 0131 473 5204 E claire. donald@shepwedd. co. uk 25 September 2008 14