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Risk Assessment for Public-Private Partnerships: A Primer

September 10, 2012

DRAFT
For review by P3 Evaluation Toolkit Beta-Testers

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Chapter 1 - Introduction

FHWA is developing several primers and research reports on various issues surrounding highway Public-Private Partnerships (P3s). This primer addresses Risk Assessment for P3s.  Companion primers on Value for Money Analysis and Financial Assessment for P3s are also available as part of this series of Primers. P3s, risk assessment and value for money analysis are briefly described in the following sections.

What are Public-Private Partnerships?

Public-private partnerships (P3s) for transportation projects are drawing much interest in the United States for their ability to ease traditional financing constraints and transfer certain project risks. P3s differ from traditional procurements where the public sponsor controls each phase of the infrastructure development process – design, construction, finance, operations and maintenance.  With a P3, a single private entity (which may be a consortium of several private companies) assumes responsibility for more than one development phase, accepting risks and seeking rewards.

Design-Build procurement – under which private contractors are responsible for both designing and building projects for a fixed price – represents the most basic form of P3. Further along the P3 spectrum, the private sector may also assume responsibility for finance, operations, and maintenance, typically via a long-term (e.g. 30 years or more) concession from the public sponsor.  This document, as well as the series of FHWA primers on P3s, is concerned primarily with forms of P3s where the private sector partner (called the "concessionaire") enters into a long-term contract to perform most or all the roles traditionally filled by the government.

Public agencies pursue P3s for a variety of reasons, including access to private capital, reduced upfront costs, accelerated project delivery, transfer of risk to the private sector, design innovation, and improved levels of service.  However, P3s– like traditional projects -- require revenue in order to pay back the upfront investment.  

P3s are complex transactions, and determining that a P3 is likely to provide a better result than a traditional approach is not simple. There are many factors that must be considered when determining the best procurement approach for a given project, including long-term costs, myriad uncertainties, risks both now and in the future, and complicated funding and financing approaches. Public agencies may conduct Value for Money (VfM) analyses to compare a P3 approach with a traditional  approach.

For more information the reader is encouraged to refer to FHWA's primer on Public-Private Partnerships, available at: http://www.fhwa.dot.gov/ipd/p3/index.htm.

Public-Private Partnerships and Risk Assessment

Project risk must be identified, evaluated, and managed throughout a project's life for the project to be successful.  Management of risks requires a public agency to proactively address potential obstacles that may hinder project success, as well as take advantage of opportunities to enhance success or save costs. P3s are considered to be a form of risk management as the public sector and private sector parties seek to achieve optimal risk allocation allowing for the management of risks by the party best able to handle them.

Project risk management is an iterative process that begins in the early phases of a project and is conducted throughout the project's life cycle. It involves systematically considering all possible outcomes before they happen and defining procedures to accept, avoid, or minimize the impact of risk on the project. Risk management follows a clearly identified process, which includes:

  • Risk identification
  • Risk analysis
  • Risk response planning (including transfer of risks to the private sector)
  • Risk monitoring, controlling, and reporting.

Risk analysis is used in the development of a P3 project for a number of reasons:

  • To develop agreement provisions that optimize value for money (discussed in Chapter 6);
  • To calculate risk adjustments as part of value for money assessments;
  • To help determine project contingency amounts; and
  • To identify and monitor mitigation actions (i.e., risk management).

For more information on the risk management process for construction, the reader is directed to FHWA's Guide to Risk Assessment and Allocation for Highway Construction Management available at: http://international.fhwa.dot.gov/riskassess/pl06032.pdf.  Also, a useful resource is the Transportation Research Board's Guidebook on Risk Analysis Tools and Management Practices to Control Transportation Project Costs (NCHRP Report 658), available at: http://www.trb.org/Main/Blurbs/163722.aspx
Note, however, that P3s may be used to manage not just construction risk, but also to address pre-construction (development phase) risks, financial risks, and risks related to the project's life cycle.   

Structure of this Primer

This Primer is structured as follows. Chapter 2 discusses how the extent of risk transfer varies by type of project and type of P3 contract.  Chapter 3 outlines the key types of risks faced in P3 projects.  Chapter 4 discusses analysis of project risks to assess their cost impacts.  Chapter 5 explains how risks are optimally allocated between the public and private sectors to minimize total project life-cycle costs. Chapter 6 discusses how costs of risks under traditional and P3 procurements may be incorporated into Value for Money analyses often used to compare the two procurement options. Chapter 7 concludes with a summary.

 

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