Understanding Risks

• A risk is any factor, event or influence

that could threaten the successful
completion of a project in terms of
time, costs, quality of assets &
services and expected returns
• Every project is exposed to a variety
of risks – commercial and non-
commercial risks
• The private sector is perhaps better
qualified to manage most of the
commercial risks
1
Risk Management
.... goes beyond risk planning...

Risk management includes: To ensure that the value for

• Identifying project & money outcome expected in
contractual risks
the initial contractual
• Developing risk
management/mitiga allocation of project risks is
tion mechanisms
not compromised and risk is
• Incorporating them into a
risk management plan managed over the life of the
• Efficiently executing the contract, the
risk management plan
government party must
• Continuous monitoring of
plan to ensure effectiveness devote adequate resources
• Updating plans with new to contract management
risk variables
activities.
2
Risk Management
... covers the entire project lifecycle

Procurement
Phase
Risk Management Monitoring
Planning Phase

Risk
Identification

Risk
Assessment
New Risk
Identified
Risk Response
Plan
Risk Monitoring and
Control
3
Risk
Assessment

4
Why Relevant?
Infrastructure is risky business

• So that identified risks can be valued and priced in

• To ensure use of accurate, risk adjusted

assumptions in the
financial and economic analysis

• Which would ensure more reliable estimates of

value for money from the PPP

• And to allocate risks in the best possible

manner to the party most qualified to handle
them
Risk analysis is often inadequate in PPP
projects 5
When is it done?
At least three times over the project life cycle

• By the government agency developing the

project

• By bidders – main subject of discussions at the

pre-bid
meeting

• By lenders and financial investors

• Thereafter it is an ongoing and coordinated

effort by the parties to the Concession
Comprehensive analysis upfront gives
Agreement
confidence to investors
6
Key Project Risks
Early Stage Risks

Completion Risks

Operating Risks

Demand/ Revenue/ Market Risks

Environmental & Social Risks

Force Majeure Risks &

Governmental Action
7
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

 DEVELOPMENTAL RISKS can be largely addressed through comprehensive and

credible project preparation studies

 SPONSOR RISKS are addressed through the qualification process – ensuring that
capable and competent bidders alone participate in the bidding process

 COUNTER-PARTY RISKS
 Where government is the purchaser of services - need to evaluate its ability to make
payments throughout the concession period or whether mechanisms such as a
dedicated fund or ring fencing arrangements need to be made
 Where government agrees to supply key inputs (MSW for instance) of a minimum
standard and in minimum quantity – need to evaluate its ability to do so sustainably -
If not what other comforts can be provided to the private partner
 Where third parties are involved – for instance fuel supply arrangements in a power
project – what kind of guarantees would be needed to ensure continuous operation
of the facility

8
 Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

COMPLETION RISKS
NATURE KEY
COMPONENTS
 Delays in site being made available
1. Ability to commence the project within the
 Delays in supporting infrastructure
budgeted time
 Delays in approvals
2. Ability to complete project within
the budgeted costs  Design & engineering risk

 Geo-technical risk – uncertain

3. Adherence of the project assets to the
ground conditions
specifications (including the quality
standards)  Construction technology

4. Completion risks can delay the project &  Availability of construction materials
increase project cost very significantly
 Contractor’s delays and failures

9
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

COMPLETION RISKS – MITIGATION MEASURES

 Assurances from GA regarding delivery of land – either 100% or the bulk of it, with
suitable penalties and comforts in the event of non-compliance

 Other assurances – environmental clearance, statutory approvals, any other support

infrastructure or activity (dredging of channel for instance in a port project) –
with suitable comforts in the event of non-compliance

 Evaluate DPR – supply of key construction inputs – material, equipment and

manpower in the vicinity of the project sites and costs of these inputs

10
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

COMPLETION RISKS – MITIGATION MEASURES

 Evaluate need for various components and specifications – extent of civil

construction, access points, grade separators, drainage etc.

 Completion Certificate by Independent Engineer – only after verification

that project assets created are as specified and of desired quality

 Other construction – in a railway over bridge – portion over rails – done by

Railways or private partner

 Incentive structure in the contract – bonuses, penalties and

liquidated damages

11
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

COMPLETION RISKS – HOW TO ENSURE PRICE REASONABLENESS

 Estimate for 4-laning NHAI projects ~ Rs 4 crore per km (in 1998-99)

 Past BOT projects (average 2006 prices) works out to Rs 5.30 crores/ km;
recent projects - per km cost range of Rs 7 crores to Rs 10 crores

 The per km rate may vary from project to project primarily due to difference in the
following:
 Civil construction - No. of RoBs, major & minor bridges, fly-overs, culverts
 Distance between project site and source of aggregates
 Kind of terrain – rolling / flat
 Difference in specifications (NHs vs SHs)
 Ground condition at project site
 Escalation in cost of inputs assumed
 Profit margins of contractors

12
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

OPERATING RISKS – NATURE OF RISKS

 Technology
 Ability to operate at desired performance level
 Risk of obsolescence

 Nature and Costs of Operations – Capacity (road capacity for instance and
level of service) and costs of operations
 Nature and Costs of Maintenance – regular, periodical, planned shutdowns

13
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

OPERATING RISKS – MITIGATION MEASURES

 Proven technology/ transfer of technology

 Systems and procedures for O&M – procedures/ manuals

 Performance guarantees/ AMC from technology provider

 Sinking Fund/ Maintenance reserve creation

 Credible Technical studies by good consultants

 Project monitoring – site visits and performance reviews

14
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

DEMAND/REVENUE/MARKET RISKS – NATURE OF RISKS

 MARKET RISK
 Traffic risk – uncertainty in forecasting, price/ demand elasticities
 Demand risk - Insufficient demand for products/ services
 Industry risk – changing structure, obsolescence/ competing facility

 PRICE RISK
 Resistance of Users to pay
 Regulatory & political control over pricing
 Delays in revisions/ inadequate revision

15
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

DEMAND/REVENUE/MARKET RISKS – MITIGATION MEASURES

 Firm throughput/ Long term off-take contracts

 Cost competitiveness of the input raw material & of the end product

 Studies by experts:
 Traffic Studies
 Willingness to Pay surveys, toll payment history
 Present count at tolling booth location

 Contractual frameworks – Liquidated Damages for short/ interrupted supply

 Sensitivity analysis

16
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

DEMAND/REVENUE/MARKET RISKS – FACTORS AFFECTING TRAFFIC

 Historical data
 Independent variables & Elasticities
 Current traffic
 Timing , duration
 Traffic mix
 Through traffic V/s Local traffic
 Proposed restrictions
 Assignment of traffic

 Other items impacting traffic

 Competing routes (present and future)
 Leakages
 Capacity augmentation
 Capacity reduction (Slow Moving Vehicles)

17
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

DEMAND/REVENUE/MARKET RISKS – FACTORS CAUSING PRICE RISKS

 Non-payment risk
 Initial Toll levels, willingness-to-pay
 Commitment of large users
 Local Vs Long distance traffic

 Toll revision (fixed/ indexed)

 Delay in toll notification

 Reduction in toll by Govt

 Exemption to certain users by Govt

18
 Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

OTHER RISKS – FINANCIAL RISKS

The risks that matter most are – completion (within budgeted costs and time), revenue
risks (demand/ traffic and tariff risks) and O&M risks. If these are comprehensively
evaluated and addressed, the rest would follow

FINANCIAL RISKS

In terms of the concession agreement – financing documents are required to be

submitted to the Concessioning Authority (CA). We need to broadly review whether:

 The financing plan is robust enough to withstand the impact of adverse factors

 The project is subject to interest rate, liquidity (tenor of borrowing) or currency risks

 This could prepare us for any crisis situation in the future

19
 Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

OTHER RISKS – ENVIRONMENTAL AND SOCIAL RISKS

ENVIRONMENTAL AND SOCIAL RISKS

Usually are identified in an EIA/ SIA study done as part of project preparation. Since the
bulk of the risk is absorbed by the CA it is important to ensure that:

 The project is insulated from the risks of land acquisition, environmental advocacy
and social issues – R&R issues, compensation claims etc – so that implementation is
not hampered

 Public consultations are duly held – issues such as access in road projects are dealt
with early in the development cycle

20
Early Stage Completion Operating Market Other Force
Risks Risks Risks Risks Risks Majeure

RESIDUAL RISKS

 Force Majeure Risks (action not within the control of either of the contracting
parties, risk of governmental action such as early determination, expropriation or
change in law and regulatory regime change risks are suitably addressed through
provisions in the concession agreement

 It is important to remember that the remedy for commercially insurable risks

would need to be insurance taken by the SPV
 The affected party would have to show that the event has had a “materially adverse
impact” on its ability to perform its obligations under the contract
 Any excuse from performance may last only till such time this ability is impaired

21
Risk Allocation in the Concession
Agreement

22
Concession Agreement and Risk Mitigation
Reflecting the Risk Allocation in a Concession Agreement
• The risk allocation framework is set out/ documented in the
Concession agreement - the contractual provisions are
critical

• Concession agreements should be structured and managed

so as to lessen the scope for a government agency to
unintentionally take back risks for which it paid a risk
premium to allocate the risk to the private party.

• PPP Tendering process reflects/attempts to develop a

continuing risk mitigation strategy through the RFQ,
RFP, and the Concession Agreement
‒ e.g. While the financial risk is partly mitigated through
examination of the credit worthiness of the bidders during the
RfQ/RfP stage, in the contract this will be further mitigated
through appropriate clauses such as substitution rights.

Contracts should accurately reflect Risk Allocation 23

Concession Agreement and Risk Mitigation
Reflecting the Risk Allocation in a Concession Agreement

• Risk Allocation, to be effective, should be suitably dovetailed in

the service obligations, payment mechanism and the project
agreements.

‒ Service Obligations: Specifications should be drafted to clearly

reflect government’s output requirements, while minimising any
prescription as to how the service is to be delivered or the asset
maintained.

‒ Payment mechanism: should be designed in a way that will

appropriately
incentivise performance by private party

‒ Other Important Agreements: Risk allocation and mitigation is

managed through a complex contractual structure. Parties will
enter
Risk into various
Allocation agreedother agreements
by the to mitigate
parties will be reflected or reallocate
in their mutualthe
risks they assume
rights (e.g. construction
and obligations contract,
as set forth in the O&M contract, off-
concession
take agreements
agreement etc.)
24
Concession Agreement and Risk Mitigation
Contractual clauses addressing various risks

• Design, construction and commissioning risk:

‒
‒
Proper specification of project outputs to be delivered

‒
Review of designs
Commissioning tests, preferably through an independent

‒ Linking contracted services to key performance indicators and,

party

in turn, to the payment mechanism

• Sponsor risk:

‒
‒
Performance Guarantee

‒
Change in ownership provisions
Step in rights to Government

25
Concession Agreement and Risk Mitigation
Contractual clauses addressing various risks

‒
• Financial risk:

‒
Financial Close

‒
Escrow Mechanism

‒
Substitution rights

‒
Step in rights to government
Termination Payments

‒
• Operating risk:
Well defined service standards with clear outputs which can
be objectively

‒ Linking contracted services to key performance indicators and,

identified and measured

‒
in turn, to the payment mechanism

‒
Address future service delivery demands
Inbuilt options for upgrading technology as the contract

‒ Escrow mechanism that prioritises project cash flows to

term proceeds

meet O&M requirements 26

Concession Agreement and Risk Mitigation
Contractual clauses addressing various risks

• Market risk:

‒ Dealing with competition (clause regarding competing

‒
facilities)
Provisions for variations in demand (e.g. variations in

‒
traffic)
Provisions for price/ tariff indexation

• Force Majeure risk:

‒
‒
Minimizing the consequences through appropriate insurance

‒ Ensure that FM events do not include events that may be

Performance obligations during the occurrence of FM event

prevented, overcome or remedied so as to ensure vigilance on

the part of the private party to prevent a risk event before it
occurs

27
Ongoing Risk Management

28
Service Delivery Monitoring
What is it?

• Service Delivery Monitoring broadly involves:

- Ensuring that contractually agreed services are
delivered as per specified quality
- Cost associated with service delivery is in line with
expectations

• Assessment of both quantitative and subjective

parameters is the key to efficient Service Delivery
Monitoring

29
Service Delivery Monitoring
It ensures achievement of defined performance standards

Service Delivery Monitoring focuses on two areas:

Performance Management
of private party in terms of efficient service
delivery that
provides expected value to the contracting
authority

Risk Management
by managing and controlling risk exposure of the
project
30
Risk Management
Developing a risk management plan

ForInstitutional
For key key Institutional ForPrivate
For key key Private
PartyParty
Risks Risks
: Risks:Risks
 Evaluate different options for  Identify obligations and
treating the risk reporting
 Identify who will be requirements
responsible for managing the  Assess resource that
risk institution devotes to
 Establish procedures and monitoring the risk
mechanisms to control the risk  Establish mechanisms to be
 Estimate resource used by institution to deal with
required to manage the failure of the private party to
risk. manage the risk, namely
penalty deductions, step-in,
etc.
 Develop & document
business contingency plan 31
Risk Management
Contents of a Risk Management Plan
Risk Management Plan
The Risk Management Plan shall include the following
information:
(a)approach to identifying, recording, monitoring,
mitigating, controlling and assessing risks;
(b)proposals for implementing the risk management
strategy notified pursuant to paragraph (a) above;
(c)details of the risk analysis undertaken in preparation
of the Risk Register; and
(d)appropriate cross-references to those parts of the safety
arrangements addressing risk management and the activities
of the Risk Management Committee undertaken pursuant to
the Risk Management and Insurance Code.

Source: LONDON UNDERGROUND JNP – PPP CONTRACT: RISK MANAGEMENT PLAN CLAUSE 32
Risk Management
Risk Monitoring

• Risks are dynamic and risk monitoring would take place throughout
the project lifecycle

• Efficiency of risk monitoring and updating would depend on how

the following questions are answered
- Are the identified risks being systematically tracked?
- Is there timely reporting of new risks that are likely to arise ?
- Is there a system to document lessons for future risk assessment and
allocation?

• To ensure an efficient Risk Monitoring the following should be

detailed and
implemented
- Comprehensive reporting procedures
- Effective monitoring and reporting of existing and new risk
- Feedback Mechanisms on analysis and mitigation
33
Risk Management
Risk monitoring & risk register updates

• Risks being monitored are documented in the risk register which is

continuously updated with the status of risk throughout the project
lifecycle.

•
Risk Template
Date of of a risk register
Description Impact Probabi Possible Target Owner Action
No. Registn. of Risk lity Response Date for
Action
Time Cost Qlty
Sno. 18/03/09 Public Project delay High Stakeholder 28/03/09 Contrac Pending
13 resistance by 6 months, communicat t Mgr
to toll cost escalation io n meeting
increases of 4%
Sno. 21/04/09 Asset Project delay Medium Mediatio 20/05/09 Contrac Preliminar
23 transfe not n t Direct y
r quantifiable, between discussion
issues significant cost disputin s
overrun g parties undertake
n
Sno. 23/04/09 Incorrect Project delay Medium Discussion 25/04/09 Contrac Initiated
25 time & cost limited, cost with pvt t Mgr/
estimates impact 2% capex party for Proj
remedial Mgr Pvt 34
Risk Management
Risk Monitoring & Escalation

Identified
risk
materialize
s
Initiate risk Assess financial
mitigation & material impact
plan of risk

No Yes Immediate risk

Is risk Is it high
escalation to
controlled impact
Contract Director
? risk?
Yes No
Report risk Regular update
Review risk to Contract
occurrence, mitigation plan;
impact & control Director on risk
make changes status
issues
Continue to Test changes to
monitor risk
risk mitigation plan
35
Preparing for Contingencies

36
Contingency Planning
Events that could be categorised
as contingencies include

CLASS OF EVENTS

Service Delivery

Service No Service
Disruption Disruption

No Pvt Party Pvt. Party Pvt Party

Default Default Default

3 TYPES OF CONTINGENCY PLANS

Business Step Defau

Continuity In lt
Plan Plan Plan
37
 Contingency Management
The Glasgow Airport Experience

On 30 June 2007
Glasgow Airport The second busiest day of the
• Owned and operated by BAA year due to the school holidays
Ltd. commencing the previous day
• Handled over 8. 8 million
passengers a year; When
Where Became the target for a
Airport is back in action car bomb attack, which
• Perpetrators arrested
• Fire brought under control propelled the airport
• Limited into the glare of the world’s
Area cordoned off.
operations Results What media and created severe
restored in
remaining area Respons business continuity issues for the
airport.
• Airport’s Media Relations e
Team handled Media
queries over 800 Emergency plans activated
calls in the first 24 hours • The airport’s integrated emergency plans kicked in
• Main terminal building • 2 teams took over :
reopened within 24 • Crisis Management Team to look after tactical
hours after the command & Business Recovery Team to look
incident started. after the strategic command
• Response time:
• The crisis team was initiated & operational within 45 4
Contingency Management
The Glasgow Airport Experience 2/3

Aftermath of the Gate is fully

attack on 30 June operational on
2007 27 July 2007

39
 Thank you for your kind attention

Acknowledgement : The slides used in this presentation are from the material
prepared for the National PPP Capacity Building Programme being implemented by
the Department of Economic Affairs, Ministry of Finance, Government of India (DEA).

40