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P3 Toolkit

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P3-VALUE: Risk Assessment Tool User Manual

December 30, 2013

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Appendix B: Risk Categories and Definitions

The risk categories provided below are only representative and do not encompass the full spectrum of risks to be considered when evaluating a project.

Reminder: The following list is not exhaustive and does not encompass all risks that project sponsors should consider.

Risk Category Description
Design Major construction projects may have several design risks as a result of deficiencies or complexities in the project's design that may impact project costs or result in delays.
Engineering & construction This risk category addresses the difficulties encountered during construction that may result in additional costs or delays in delivery and/or service. Generally, the private contractor responsible for construction is allocated many of these risks; however, the project delivery method and the responsibilities of the public agency can impact the risk allocation.
Planning & approvals The public or private sectors face a significant risk if they do not obtain the necessary approvals required to construct and operate the asset. A non-comprehensive list of necessary approvals may include: environmental approvals, construction approvals, operating licenses, approvals to move or disrupt utilities, and design approvals. If the correct permits cannot be obtained, the project can face significant delay.
Environmental Major construction projects have numerous environmental risks which are dependent upon the type of construction being performed and the geographical characteristics of the surrounding environment. These risks need to account for potential prevention and clean-up cost for environmental issues and for the effect that unforeseen environmental issues may have on the overall schedule of the project.
Right-of-Way/utilities Most major construction projects involve the acquisition of land and right-of-way entitlements. These are often handled by the public sector. Also, new construction may often encounter existing utilities (water, gas, electricity, sewage). The private and public sectors can work together to identify the utilities impacted by the construction and agree how to approach negotiations with utility companies.
Commercial / procurement There are several risks that can impact a project's procurement, such as having too few qualified contractors bidding on the project (which reduces competition), or having bidders that are not willing to accept the project allocation as set out in the draft Project Agreement. Commercial/procurement risks can generally be mitigated to some degree by conducting regular interaction with industry to assess market conditions during the project development phase and when structuring the procurement process.
Latent defect These risks address undetected or unseen damages or deterioration of existing infrastructure or assets. These risks may occur during the construction phase for any existing assets, or during the operating phase once construction has been completed.
Operations These risks address variables or conditions that may affect the operation of a project, such as disputes between asset operators and contractors when operational areas are not clearly defined for each contractor.
Maintenance During the project's operating period, the cost and scope of maintenance functions may exceed the cost and scope set in the Project Agreement. For example, the road surface may deteriorate faster than anticipated and additional maintenance may be required to keep the road fully operational.
Availability Availability risks impact the service level provided by the asset, which can impact project revenues. For example, a plant failure may shut down a tunnel's ventilation system, resulting in the tunnel being closed until the failure is rectified. Under a P3 with an availability payment, this may result in a penalty to the private sector under the Project Agreement. It may also result in a loss of revenue for the public sector tolling agency.
Market demand Market demand risks can impact project performance due to demand of services being greater or less than initially projected. Market demand risks may include risks related to variations from the traffic forecast assumptions or network changes that impact demand for the project.
Hand-back Hand-back risks are specific to delivery methods where the private sector operates and maintains the asset and returns it to the public agency at the end of the contract. These risks involve identifying the key aspects of the asset which may deteriorate during the project's life cycle and determining what precautions are required to guarantee that the asset meets the agreed upon specifications when returned. Mitigation strategies for hand-back provisions usually include the agreement to recommend an independent engineer to analyze the asset and estimate the cost of the required repairs several years before the end of the concession, and account for payment deductions put into an escrow account to cover the estimated costs.
Financial & economic Financial risks can include fluctuations in interest rates and availability of finance, which may have a dramatic effect on the project viability and financing structure. Similarly, changes in economic conditions such as inflation rates may also impact viability. At different stages in the project's life cycle, the allocation of financial and economic risks may vary.
Force majeure Force majeure risks are risks that are outside the control of either the public or private sector, such as natural disasters. The approach to addressing these risks is typically agreed to in the Project Agreement.
Political Political risk refers to government actions that may impact a project. For example, changing political priorities may impact funding availability or the timely receipt of approvals, which can result in delays and additional costs.
Insurance Insurance risks are risks that insurance firms may not be willing to cover. For example, insurance companies may be unwilling to insure equipment during the construction of an underwater tunnel. The allocation of these risks can depend on the project delivery method and there may be uninsurable risks that are addressed in the Project Agreement.
Public sentiment Public sentiment risks may range from simple public concern over a project's proposed scope or location to public protests blocking access to construction sites or reducing demand. The costs of these risks can include delays in the project and additional costs if scope changes are required, as well as revenue loss if they occur during the operations phase.
Changes in law & policy Over the length of the project, there is the potential that governments may enact new laws or policies which impact the project or the private sector contractors. These risks can be separated into discriminatory changes which are focused on the particular project, contractors or P3s and non-discriminatory changes which are not directed specifically at the project, contractors, or P3.
Tolling Tolling risks can include risks associated with toll collection, interoperability, toll enforcement and technical risks associated with the tolling equipment. These risks occur during the operating phase of a project and can impact project revenues as well as operating and maintenance costs.

 

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