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P3 Toolkit

Analytical Tools

Webinar - P3 Project Risk Assessment

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Webinar recording: Audio

P3 Project Risk Assessment

P3-VALUE Webinar - June 13, 2013
Patrick DeCorla-Souza
P3 Program Manager
Office of Innovative Program Delivery

FHWA's P3 Toolkit

  • The P3 Toolkit provides educational tools and guidance documents to enhance the capacity of public sector decision-makers to analyze procurement options
  • Will address four key phases of P3 implementation:
    1. Legislation and policy
    2. Planning and evaluation
    3. Procurement
    4. Monitoring and oversight

P3-VALUE Webinars

  • P3-VALUE: Suite of four integrated analytical tools and supporting documentation to help practitioners understand processes used to quantitatively evaluate P3 options
  • This is the second of four webinars on P3-VALUE.

P3-VALUE Tools

  • Risk Assessment Tool
    • Identifies risks, risk allocation, risk response strategies, potential cost and schedule impacts
  • Public Sector Comparator (PSC) Tool
    • Estimates risk-adjusted life cycle costs of conventional procurement
  • Shadow Bid Tool
    • Estimates costs of P3 procurement, including payments to private partner
  • Financial Assessment Tool
    • Compares PSC and Shadow Bid costs to calculate value for money

 P3-VALUE Tools are accessible at: http://www.fhwa.dot.gov/ipd/p3/toolkit/analytical_tools/index.htm

Risk Assessment Tool

Purpose

  • To identify risks, risk allocation, risk response strategies potential cost and schedule impacts of project risks
  • To estimate value of retained and transferrable project risks

Prerequisites

  • Project preliminary design, scope, and alignment
  • Estimated schedule, procurement options, and life cycle costs

Course Outline

Lesson 1 - P3s and Risk
Lesson 2 - Risk Management Process
Lesson 3 - Risk Assessment
Lesson 4 - Risk Allocation
Lesson 5 - Risk and Value for Money
Lesson 6 - Using the Risk Assessment Tool
Summary

Course Objectives

After taking this course you should be able to:

  • Describe the various transportation project delivery models
  • Identify types of risks in the life cycle of a major project
  • Explain the methods for quantifying and monetizing the value of individual risks
  • Describe how financial impacts of risks are incorporated into Value for Money analysis
  • Access the tools and supporting information

Lesson 1 - P3s and Risk

What is a P3?

  • Acronym: Public-private partnership (P3 or PPP)
  • Definition: Contractual agreement between a public agency and a private entity covering more than a single project phase or function
  • Purpose: To allow private participation in the delivery and financing of transportation projects when it creates greater value and is in the public interest

Common Types of P3s

Flow chart showing common types of P3s

Potential Benefits and Drawbacks

Potential Benefits Potential Drawbacks
  • Additional Financial Capacity
    • Gap financing accelerates project delivery
    • Conserves public sector debt capacity
  • Lifecycle Cost Efficiencies
    • Creates incentives to manage lifecycle costs
    • Integrates project phases creating efficiencies
  • Risk Transfer
    • Budget and cost certainty
    • Improved risk management reduces costs
  • Loss of flexibility of public agency
    • Changing priorities
    • Integration of facility into the wider network
  • Increased financial costs
    • Higher cost for private capital
  • Complex procurement process
    • Higher costs for procurement
    • Need for P3 expertise to conduct negotiations

Types of Project Risks

  • Design-Build phase
    • Site - right-of-way acquisition, ground condition, utilities, permits, archaeological, etc.
    • Construction - design, change orders, weather, price adjustments, latent defect, etc.
  • Operations phase
    • Demand/ revenue - traffic, appropriations, etc.
    • Performance - latent defect, inflation, regulation, etc.
  • General risks
    • Political - opposition, changes in law or administration
    • Economic - inflation, interest rates
    • Other - force majeure, environmental permitting and approvals

Financial Impacts of Project Risks

  • Costs
    • Capital and O&M
  • Schedule
    • Delays impact costs as well as revenues
  • Revenue
    • Reduced toll revenue or availability payments

Purpose of Risk Assessment in P3

  • To calculate value of risks transferred to private sector and retained by public sector for value for money analysis
  • To design technical requirements and commercial terms prior to developing draft agreement for RFP
  • To assist in negotiation with bidders over the allocation and pricing of risk
  • To develop risk management plans and reporting requirements

Construction Phases Uncertainties

  • Base Variability - inherent uncertainty not caused by risk events
    • Function of level of design & estimation process
    • We know it's going to happen, but don't have enough information to estimate the cost accurately
  • Risk- an uncertain event or condition that, if it occurs, has a negative or positive effect on project's costs, schedule or revenues
    • Negative impacts: threats
    • Positive impacts: opportunities
    • Two types:
      • Known unknowns - "It might happen, but at least we are aware of it."
      • Unknowns - "We didn't see that coming."
    • Function of level of design & estimation process

Construction Cost Uncertainty

Construction Cost Uncertainty chart showing anticipated and contingency cost risks

Risk Magnitude over Concession Term

Bar chart showing risk magnitude decreasing as the project progresses through phases of completion

Audience Feedback

On average, how much contingency does your agency include in cost estimates to account for risk in the planning phase? In the design phase?

  • None
  • 0 - 2 percent
  • 2 - 5 percent
  • 5 - 10 percent
  • 10 - 15 percent
  • More than 15 percent
  • Not sure

Questions?

Submit a question using the chat box

Lesson 2 - Risk Management Process

Risk Management Process Overview

  1. Identification
    • Type & timing of risk
  2. Assessment & Analysis
    • Probability & consequence of risk
  3. Risk Response Planning
    • Minimization of risk impact
  4. Allocation
    • Transfer of appropriate risks
  5. Monitoring & Control
    • Ongoing oversight of risks

Flow chart of above elements in a circular pattern

1. Risk Identification

Risk Workshops

  • When?
    • Early in project development process
  • Who?
    • Facilitator
    • Subject matter experts:
      • Design and Construction Engineering
      • Environmental
      • Geological/Hydrological
      • Financial
      • Policy/Planning
  • What information is needed?
    • Defined project scope and preliminary design
    • Potential procurement options
    • Planning and environmental studies
    • Traffic and revenue study (for tolled projects)
  • What tools are used?
    • Risk Checklist
    • Risk Register

Flow chart with Identification highlighted as the referenced phase

2. Risk Assessment & Analysis

  • Calculating the Value of Risk
    • Probability x Consequence
  • Potential Consequences
    • Cost
    • Schedule
    • Revenue
  • Types of Assessments
    • Qualitative
    • Quantitative

Flow chart with Assessment/Analysis highlighted as the referenced phase

3. Risk Response Planning

Risk Response Strategies

  • Avoid: Reduce probability of risk event occurring
  • Mitigate: Reduce consequence of risk event if it does occur (both cost and time)
  • Transfer/Share: transfer risk to a party more capable of (or willing to) managing the risk

Flow chart with Mitigation/Planning highlighted as the referenced phase

4. Risk Allocation

  • Transferrable Risks
  • Retained Risks
  • Shared Risks

Flow chart with Allocation highlighted as the referenced phase

5. Risk Monitoring & Control

  • Revisit risk register as risks become clearer
  • Use performance metrics to monitor risk
  • Understand P3 agreement and negotiated risk management provisions
  • Avoid taking back transferred risks

Flow chart with Monitoring and Control highlighted as the referenced phase

Audience Feedback

In your view, which of the following risks may be managed at lower cost by the private sector?

  • Environmental
  • Land acquisition
  • Utilities
  • Financial
  • Design/geotechnical
  • Construction
  • Traffic/revenue
  • Operation/maintenance

Questions?

Submit a question using the chat box.

Lesson 3 - Risk Assessment

Risk Assessment Process Overview

Risk Assessment Process Overview flow chart

Key Inputs

  • Probability of risk occurrence
    • Qualitative - very low, low, medium, high, very high
    • Quantitative - % probability (0% - 100%)
  • Scale of impact if risk occurs
    • Qualitative - very low, low, medium, high, very high
    • Quantitative - dollar amount or number of days of delay

Qualitative Risk Assessment

  • Risk Matrix

Screen shot of Risk Matrix

Quantitative Risk Assessment

  • Formula-based Risk Assessment (VDOT example)
    • Impact = Probability X (Min.+ Max.+ 4 * Most Likely) / 6
  • Example:
  Risk 1 Risk 2 Aggregate
Probability 50% 80%  
Consequence (min.) $1 M $0.5 M  
Consequence (max.) $5 M $1.5 M  
Consequence
(most likely)		 $4.5 M $1.0 M  
Expected impact of risk using VDOT formula 0.50 X $24M / 6
= $2 M		 0.80 X $6M / 6
= $0.8 M		 $2.8 M
  • Monte Carlo simulation
    • Simulation of large number of scenarios based on probabilities of risk occurrence and probabilities of magnitude of risk impact
  • Example:
  Risk 1 Risk 2
Probability 50% 80%
Consequence (min.) $1 M $0.5 M
Consequence (max.) $5 M $1.5 M
Consequence (most likely) $4.5 M  
Type of probability distribution of consequence Triangular Uniform

Simple Probability Distributions

Probability Distribution

Quantitative Risk Assessment

  • Monte Carlo Simulation Results

Sample Simulation results chart

  • Cost Impact Outputs

Sample Cost impacts chart

Risk Assessment Challenges

  • Estimating risk impacts and probabilities with limited data
    • Avoiding optimism bias
    • Or overestimating PSC risks
  • Accounting for correlation among risks
  • Accounting for "unknowns"
  • Avoiding double-counting of risks
    • Project risks vs. "systematic" risks accounted for in financing risk premiums or discount rates
  • Accounting for revenue risks
  • Aggregating low probability/low consequence risks
  • Accounting for procurement phase risks that are unique to P3s

Test Your Knowledge

True or False:
In quantitative risk assessment, every risk - whether low, medium, or high - is quantified individually with regard to probability and scale of impact.

Questions?

Submit a question using the chat box

Lesson 4 - Risk Allocation

Risk Transfer Principles

  • P3s do not transfer all project risk
  • Risk is allocated to party most capable of managing the risk
    • "Managing risk" may mean insuring that risk
  • Risk transfer will increase the bid price of the private sector
  • Transferring risks can incentivize performance
  • A risk may be shared if neither party is more capable of managing it
  • Risks have a value (or cost) that varies over time

Financial Impact of Risk Transfer

Financial Impact of Risk Transfer Bar chart

Risk Transfer by Procurement Type

Procurement Type Design Risk Construction Risk Financial Risk O&M Risk Traffic & Revenue Risk
Design-Build (DB) X X
Design-Build- Finance (DBF) X X X
Design-Build- Finance- Operate- Maintain (DBFOM) w/Availability Payment X X X X
DBFOM w/Toll Concession X X X X X

Port of Miami Tunnel 47 Risk Allocation Example

Risk Category FDOT Private Shared
Political X    
Financial   X  
Traffic and Revenue X    
Right of Way X    
Planning and Permitting     X
Utilities     X
Procurement X    
Construction   X  
Operations and Maintenance   X  
Hand-Back   X  
Force Majeure     X
Change in Law X    
Geotechnical     X

Test Your Knowledge

True or False :

The goal in risk allocation is to transfer as much risk as possible to the private partner in a P3.

Questions?

Submit a question using the chat box

Lesson 5 - Risk and Value for Money

What is Value for Money?

  • Value for Money (VfM)
    • The optimum combination of life cycle costs and quality of a good or service to meet the user's requirements
    • Expressed as cost difference (dollars or %) between conventional and P3 procurement
  • VfM Analysis
    • Quantitative analysis to compare the financial impacts of procurement alternatives for a project
    • Compares present value of costs for P3 vs. present value of costs for conventional project delivery
    • Considers value of transferred and retained risks under different procurement options

Value for Money Analysis

  1. Identify potential procurement options
  2. Identify, monetize and allocate project risks
    1. Risk identification
    2. Risk quantification
    3. Aggregate risk valuation
    4. Risk allocation
  3. Apply risk values to expected cash flows over project lifecycle in the public sector comparator (PSC) and P3 option ("shadow bid")
  4. Discount cash flows to calculate net present costs of PSC and Shadow Bid
  5. Compare public sector comparator to P3 option
  6. Consider qualitative factors

Hypothetical Example

  • Conventional procurement - Design-Bid-Build (DBB)
  • P3 options - 23-year Design-Build-Finance-Operate- Maintain (DBFOM) concession, including 3-year design- build phase, with:
    • Availability payment (option 1)
    • Toll (option 2)
  • Illustrative assumptions:
    • Risks transferred to P3 concessionaire are managed at 50 percent lower cost
    • P3 concessionaire may increase toll revenue by 5 percent for toll concession (opportunity)
    • Future cash flows discounted using public sector borrowing rate

Valuation of Transferrable Risks

Real dollar values Conventional P3-Avaliability P3-Toll
Value of threats -$100 M -$50 M -$50 M
Year 1 cash flow impact -$20 M -$10 M -$10 M
Year 2 cash flow impact -$70 M -$ 35 M -$ 35 M
Year 3 cash flow impact -$10 M -$5 M -$5 M
Value of opportunities -- -- +$200*
Year 4 through 23 cash flow impact     +$10 M per year

*Note that the opportunity for additional revenue can reduce the bid price of the concessionaire, thus can represent a cash flow increase for the public agency also.

Nominal Cash Flows of Transferrable Risks

Nominal dollar values at 3% annual inflation rate Conventional P3-Avaliability P3-Toll
Threats (negative risks)      
Year 1 cash flow impact -$20.6 -$10.3 -$10.3
Year 2 cash flow impact -$74.3 -$37.1 -$37.1
Year 3 cash flow impact -$10.9 -$5.5 -$5.5
Opportunities (positive risks) -- --  
Year 4 cash flow impact     +$11.3
Year 23 cash flow impact     +19.7

Present Value of Transferrable Risks

5% nominal discount rate applied to nominal cash flows Conventional P3-Avaliability P3-Tolll
Threats (negative risks)      
Year 1 cash flow impact -$19.6 -$9.8 -$9.8
Year 2 cash flow impact -$67.4 -$33.7 -$33.7
Year 3 cash flow impact -$9.4 -$4.7 -$4.7
Subtotal -$96.4 -$48.2 -$48.2
Opportunities (positive)      
Year 4 cash flow impact     +$9.3
Year 23 cash flow impact     +$6.4
Subtotal for 20 years     +$155.2
Present value of risks -$96.4 -$48.2 +$107.0

How Does Risk Affect VfM?

  • Transferred risks increase Initial Cost of P3 options, but retained risks in conventional procurement (PSC) may make it more costly than P3 options overall

Bar chart showing risks costs

NOTE: This figure is for demonstration purposes only. One should not conclude that a P3-Toll concession is less costly than a P3-Availability concession.

Audience Feedback

Has your agency conducted a value for money analysis?

  • Yes
  • No
  • Not sure

Questions?

Submit a question using the chat box.

Lesson 6 - Using the Risk Assessment Tool

Accessing the Risk Assessment Tool

Supporting Documentation

  • Orientation Guide
  • User Manual and Quick Start Guide
    • Risk Assessment Tool User Manual provides technical guidance, including a two-page "quick-start guide" for exploring the tool
  • Primer
    • Risk Assessment for Public-Private Partnerships: A Primer explains the basic concepts involved in risk assessment
  • FAQs and Troubleshooting Guide
  • Guidebook (under development)
    • Risk Assessment & Allocation for Public-Private Partnerships Guidebook will provide an advanced understanding of the practical applications and challenges of assessing P3 project life cycle risks

Getting Started With the Tool

Introduction & Quick- Start Guide Users must accept the acknowledgement to access the tool. Instructions on how to use the Risk Tool are also provided.
Table 1. Model Assumptions Allows users to input project data that can serve as a reference for determining the values in the quantitative risk assessment and which affect the schedule impact outputs.
Table 2. Definitions Defines key terms used throughout the Risk Tool and contains pre-defined inputs that enable the tool to operate.
Table 3. Risk Assessment Matrix Provides an example Cost Impact Matrix and Schedule Impact Matrix that support the qualitative risk assessment.
Table 4. Risk Register The outcomes from each stage of the risk assessment process are captured here.
Tables 5-8. Outputs Display the total risk impacts generated from the risk assessment process.

Using the P3-VALUE Tool

  • Risk Register

Sample Risk Register screen

  • Qualitative Risk Assessment

Sample Qualitative Risk Assessment screen

  • Quantitative Risk Assessment

Sample Quantitative Risk Assessment screen

  • Risk Allocation & Mitigation

Sample Risk Allocation and Mitigation screen

Risk Assessment Tool Limitations

  • Risk Assessment Tool is not suitable for all types of potential scenarios
    • Monte Carlo Simulation does not accommodate revenue risks
  • Risk Assessment Tool assumes all risks are independent, with no correlation between the risks
  • Risk Assessment Tool does not aggregate lower-rated risks
    • Users can do an "off-sheet" calculation if the impacts of those aggregated risks represent a more significant risk

P3-VALUE Tools

Flow chart

P3-VALUE Tools are accessible at:  http://www.fhwa.dot.gov/ipd/p3/toolkit/analytical_tools/index.htm

Questions?

Submit a question using the chat box

Course Summary

Course Recap

Lesson 1 - P3s and Risk
Lesson 2 - Risk Management Process
Lesson 3 - Risk Assessment
Lesson 4 - Risk Allocation
Lesson 5 - Risk and Value for Money
Lesson 6 - Using the Risk Assessment Tool

Resources

IPD's P3 Website:
http://www.fhwa.dot.gov/ipd/p3/

FHWA Risk Assessment Primer:
http://www.fhwa.dot.gov/ipd/pdfs/p3/p3_risk_assessment_primer_122612.pdf

FHWA Risk Valuation and Allocation Factsheet:
http://www.fhwa.dot.gov/ipd/pdfs/p3/factsheet_02_riskvalutationandallocation.pdf

P3-VALUE Website:
http://www.fhwa.dot.gov/ipd/p3/toolkit/index.htm

P3-VALUE Risk Assessment Tool:
http://www.fhwa.dot.gov/ipd/p3/toolkit/analytical_tools/index.htm

P3-VALUE Risk Assessment User Manual:
http://www.fhwa.dot.gov/ipd/pdfs/p3/p3_value_riskassessment_manual_v1.pdf

Upcoming P3-VALUE Training

July 11: Public Sector Comparator/Shadow Bid 201

Aug. 7: P3 Financial Assessment 201

Aug. 23: P3 101

Sept. 5: P3 Evaluation Overview

Sept. 19: P3 Project Risk Assessment 201

Oct. 3: Public Sector Comparator/Shadow

Oct. 17: P3 Financial Assessment 201

To register, please visit http:// www.nhi.fhwa.dot.gov/resources/webconference/eventcalendar.aspx

Contact Information

Patrick DeCorla-Souza
P3 Program Manager
Office of Innovative Program Delivery
Federal Highway Administration
(202) 366-4076
Patrick.DeCorla-Souza@dot.gov

Jim Sinnette
Project Delivery Team Leader
Office of Innovative Program Delivery
Federal Highway Administration
(202) 366-1561
James.Sinnette@dot.gov

Thay N. Bishop, CPA, CTP
Senior Program Advisor/Capacity Builder
Office of Innovative Program Delivery
Federal Highway Administration
(404) 562-3695
Thay.Bishop@dot.gov

Questions?

Submit a question using the chat box.

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