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Risk

Appropriate allocation of project risk between the government and private parties—and effective management of those risks in practice—is critical to achieving the potential benefits from successful PPP projects. Many elements of the PPP project structure—such as the allocation of responsibilities and the payment mechanism—stem from the risk allocation. The process of structuring a PPP is therefore primarily a process of risk allocation.

Identifying risks

PPP risks vary depending on the country where the project is implemented, the nature of the project, and the assets and services involved. Nonetheless, certain risks are common to many types of PPP project. The first step toward structuring the PPP is to put together a comprehensive list of all the risks associated with the project—that is, factors that could cause unpredictable variation in the project's value.

The following categories of risk are common to many PPPs:

  • Site: risks associated with the availability and quality of the project site
  • Design, construction and commissioning: risk of construction delays construction, cost overruns, or poor design or construction quality
  • Operation: the risk of interruption in service or asset availability, or that costs are higher than expected
  • Demand, and other commercial risk: risk that demand for the service is not as predicted or revenue collection
  • Legal, Regulatory or political: risk that laws or regulations or political winds will change that affect the project
  • Default: risk that the private party is not financially or technically capable of implementing the project
  • Economic or financial: risk of changes in interest rates, exchange rates, or inflation
  • Force Majeure: risk from natural disasters, war or civil disturbance
  • Asset value: risk that the value of the assets at the end of the contract is not as expected.

Assessing risks

To focus effort when allocating risks, it is helpful to consider the importance of the different risks. Some risks will be much more significant than others: in terms of the likelihood of the risk occurring, the severity of its impact, or both. Risk can be assessed either quantitatively, or qualitatively.

In practice, many implementing agencies take a qualitative approach at this stage. Each risk is categorized as being low, medium, or high for both risk status (likelihood) and impact. Most effort should be directed to managing those risks identified as being both high likelihood, and high impact.

For some key risks—such as demand—quantitative assessment may be warranted.

Allocating project risks

A central principle of risk allocation is that each risk should be allocated to whoever can manage it best.

Risk allocation is achieved primarily through the PPP contractual agreements. The payment mechanism is the central tool for allocating risk—including construction and operational performance risk, through availability-based payments and bonus or penalty mechanisms; demand risk, if the private party will charge users; and macroeconomic and other risks, by defining payment or fee adjustment mechanisms. The government may then accept back or share certain project risks through guarantees or indemnity clauses, such as minimum revenue guarantees. Termination clauses and payment commitments are also crucial, in defining the cost to each party of walking away from the contract.

Learn More

    • 2014
    • Asian Development Bank (ADB), World Bank Group (WBG), Inter-American Development Bank (IDB), PPIAF

    Risk

    PPP Reference Guide Version 2.0

    Sections 3.3.1 to 3.3.3 of the PPP Reference Guide discuss identifying and allocating risk, and how to translate it into the contract.  The PPP Reference Guide presents a global overview of the diversity of approaches and experiences in the implementation of PPPs, providing an entry point to the substantial body of knowledge on PPPs that has been built up by practitioners in governments, the private sector, international institutions, and academics. It seeks to provide advice on what PPP practitioners should know, rather than provide advice on what to do. 

    • 2007
    • Timothy C. Irwin
    • World Bank Group (WBG)

    Government Guarantees

    Allocating and valuing risk in privately financed infrastructure projects

    Many governments want private firms to finance new infrastructure. The firms, in turn, often want the government to bear some of the risks. They might ask the government to compensate them if demand falls short of forecasts or to promise to repay their debts if they become insolvent. At the very least, they probably want the government to allow them to charge a certain price or else compensate them accordingly. This book aims to help governments respond to such requests. As well as seeking to make precise the oft-invoked principle that risks should be allocated to those best placed to manage them, it explains how governments can value the guarantees they are thinking of granting and how they can modify aspects of public-sector...

    • 2010
    • Edward Farquharson, Clemencia Torres de Mästle, E.R. Yescombe, and Javier Encinas
    • PPIAF

    How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets

    This guide reviews the necessary steps to successfully engage and manage a public-private partnership (PPP) from the early stages. It presents a framework that highlights the requirements, options, and challenges that governments face when embarking into PPPs, and explains how to address them so that a sound PPP program can be implemented and the benefits for both public and private partners can fully materialize. This book draws on experiences from both mature and developing PPP markets across the world, and case studies illustrate the key messages throughout. It discusses the policies, processes, and institutions needed to select the right projects and then manage preparation for market and operation. It identifies the underlying...

    • 2009
    • Jeffrey Delmon
    • World Bank Group (WBG), PPIAF

    Private Sector Investment in Infrastructure

    Project Finance, PPP Projects and Risk 2nd edition

    Investment in infrastructure is critical to economic growth, quality of life, poverty reduction, access to education, good quality healthcare and achieving many of the goals of a robust and dynamic economy. But infrastructure is difficult for the public sector to get right. The private sector (through public-private-participation - PPP) can help with the following: provide more efficient procurement, refocus infrastructure services on consumer satisfaction and life cycle maintenance, place the financial burden of providing infrastructure on consumers rather than taxpayers and provide new sources of investment. This is a translation of the Practical guide on PPPs for policy makers into Russian. The publication provides a practical guide...

    • 2008
    • Government of Australia

    Australian National PPP Guidelines Volume 4: Public Sector Comparator Guidance

    Australian governments are committed to investing in infrastructure and delivering improved services to the community. Infrastructure investment is critical to our economic prosperity, and governments across jurisdictions currently seek the participation of the private sector in the delivery of infrastructure and related services to the public. Public Private Partnership (“PPP”) arrangements are one way of delivering infrastructure investment. The National PPP Guidelines (the “Guidelines”) have been prepared and endorsed by Infrastructure Australia and the State, Territory and Commonwealth Governments as an agreed framework for the delivery of PPP projects. The guidelines provide a framework that enables both the public and private...

    • 2002
    • Asian Development Bank (ADB)

    Handbook for Integrating Risk Analysis in the Economic Analysis of Projects

    The purpose of this Handbook is to support the development of a practical and operationally relevant methodological framework for the analysis of risk in project design and project economic analysis.

    • 2015
    • Boston Consulting Group, World Economic Forum

    Strategic Infrastructure Mitigation of Political & Regulatory Risk in Infrastructure Projects

    To encourage sustainable economic growth, the global infrastructure program depends on private investors and operators - but they worry about political & regulatory risks. There are many facets of those risks beyond outright expropriation, such as delayed permits and community protests, unfair tax law changes, and corruption. This new World Economic Forum report, developed in collaboration with Boston Consulting Group, provides a 20-point risk-mitigation framework, listing promising measures for public and private stakeholders alike. It shows how a predictable and transparent regulatory environment can spur urgently needed investments into infrastructure to benefit societies at large.

    • 2007
    • Elisabetta Iossa, Giancarlo Spagnolo, and Mercedes Vellez
    • World Bank Group (WBG)

    Best Practices on Contract Design in Public-Private Partnerships

    Provides guidance on several elements of contract design for public-private partnerships, including risk allocation, designing the payment mechanism, flexibility and renegotiation, contract duration, and other contractual issues to do with dealing with change. Features numerous case studies. This is the final version of a report (also prepared for the World Bank), which had been titled "Best Practices on Contract Design in PPPs: Checklist."

    • 2010
    • Jeffrey Delmon
    • World Bank Group (WBG), PPIAF

    Creating a Framework for Public-Private Partnership Programs

    A Practical Guide for Decision-makers

    Public private partnerships (PPP) represent an approach to procuring infrastructure services that is radically different from traditional public procurement. It moves beyond the client-supplier relationship when government hires private companies to supply assets or a service. PPP is a partnership between public and private to achieve a solution, to deliver an infrastructure service over the long term. It combines the strength of the public sector’s mandate to deliver services and its role as regulator and coordinator of public functions with the private sector’s focus on profitability and therefore commercial efficiency. There is a tendency to approach reform of the PPP framework as a single action, generally delivered by external...

    • 2014
    • Jeffrey Delmon
    • PPIAF, World Bank Group (WBG)

    Programmes de Partenariats Public-Privé: Créer un Cadre pour les Investissements du Secteur privé dans les Infrastructures

    • 2014
    • European PPP Expertise Centre (EPEC), European Investment Bank (EIB)

    Risk Distribution and Balance Sheet Treatment. Practical Guide.

    Second Edition

    This practical guide is intended to give advice on the impact that the risk distribution between government and the PPP or concession partner (the “partner”) in a specific project has on government deficit and debt. It contains a checklist of issues (the “Checklist”) designed to help procuring authorities determine the possible statistical treatment of a PPP or concession project. Risk distribution and balance sheet treatment are important aspects in PPPs. Understanding the underlying issues and their consequences is often of great concern to procuring authorities. In 2010, EPEC issued a report on the Eurostat Treatment of Public-Private Partnerships to set the context of these issues. The report clarified the meaning and purposes of...

    • 2014
    • Asian Development Bank (ADB), World Bank Group (WBG), Inter-American Development Bank (IDB), PPIAF

    Riesgo

    Asociationes Publico-Privadas: Guia de Referencia Version 2.0

For legal and regulatory resources go to PPPIRC

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