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P3 Toolkit

P3-VALUE Webinars

Webinar - P3 Project Risk Assessment

Presentation: PDF
Transcript: HTML
Homework Assignment 4: Risk Assessment for a Non-tolled Project - Assessing Risk
Webinar recording: Audio
Q&A: HTML

P3-VALUE Webinar - September 20, 2013

Patrick DeCorla-Souza
P3 Program Manager
Office of Innovative Program Delivery

FHWA's P3 Toolkit

  • FHWA's Public-Private Partnerships (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 Tools

  • Risk Assessment Tool
    • Assists in identifying 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

Location of Risk Assessment tool in flow diagram, as Step 1.

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

Course Outline

Lesson 1 - P3s and Risk

Lesson 2 - Risk Management Process

Lesson 3 - Risk Analysis and Valuation

Lesson 4 - Risk Allocation

Lesson 5 - Risk and Value for Money Analysis

Lesson 6 - Using the P3-VALUE Risk Assessment Tool

Summary

Course Objectives

After taking this course you should be able to:

  • Identify types of risks in the life cycle of a major project
  • List the steps in the risk management process
  • 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 P3-VALUE tools and supporting information
  • Be equipped to test-run the P3-VALUE Risk Assessment tool

Lesson 1 - P3s and Risk

Common Types of P3s

Types of P3s

<text of above image>

  • P3
    • Brownfield (primarily toll concessions)
    • Greenfield
      • Design-Build-Finance
      • Design-Build-Finance-Operate-Maintain*
        • Toll Concession
        • Availability Payment Concession

*Focus of P3 VALUE tools

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
  • Complex procurement process
    • Higher costs for procurement
    • Need for P3 expertise to conduct negotiations
  • Increased financial costs
    • Higher cost for private capital

Purpose of Risk Assessment

  • To evaluate financial viability
  • 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

Financial Impacts of Project Risks

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

Categorization of Risks

Categorization of Risks

Project Risks

  • Includes both systematic and non-systematic risks

systematic and non-systematic risks

Regular Uncertainties vs. Pure Risk

  • Regular uncertainty- 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
    • "Allowance" estimate
  • 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
    • "Contingency" estimate

Identified vs. Unidentified Risks

  • Identified risks
    • Known unknowns - "It might happen, but at least we are aware of it."
    • Accounted for in a "risk register"
    • Can be valued and accounted for in cash flows through a "contingency" amount, or through a "risk premium" in concessionaire's financing costs
    • May be transferred to subcontractors
  • Unidentified risks
    • Unknowns  -- "We didn't see that coming."
    • Not accounted for in the "risk register"
    • Can be accounted for in cash flows through a contingency or through "risk premiums" in financing costs

Base Estimate vs. Risk Contingency

Base Estimate vs. Risk Contingency

Risk Premium over Concession Term

Risk Premium over Concession Term chart

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
  • I don't know

Questions?

Submit a question using the chat box

Lesson 2 - Risk Management Process

Risk Management Process Overview

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

1. Risk Identification

Risk Workshops

  • Risk flow chart, Identification element highlighted
Who?
    • Facilitator
    • Subject matter experts:
      • Design and Construction
        Engineering
      • Environmental
      • Geological/Hydrological
      • Financial
      • Policy/Planning
  • What tools are used?
    • Risk Checklist
    • Risk Register

2. Risk Analysis and Valuation

  • Risk flow chart, Analysis highlighted
Calculating the Value of Risk
    • Probability x Consequence
  • Potential Consequences
    • Cost
    • Schedule
    • Revenue
  • Types of Assessments
    • Qualitative
    • Quantitative

3. Risk Response Planning

Risk flow chart, Mitigation and Planning highlighted
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 managing the risk

4. Risk Allocation

  • Transferrable Risks
  • Retained Risks
  • Shared Risks

Risk flow chart, Allocation highlighted

5. Risk Monitoring & Control

  • Risk flow chart, Monitoring and Control highlighted
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

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 Analysis and Valuation

Risk Assessment Process Overview

Risk Assessment Process Overview chart

Types of Analysis

  • Qualitative
  • Quantitative:
    • Deterministic - uses a formula
    • Probabilistic - uses simulation

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

Representative Cost Impact Assessment Matrix and Representative Schedule Impact Assessment Matrix

Deterministic Analysis

  • Formula-based Risk Assessment (VDOT example)
    • Impact = Probability X (Min.+ Max.+ 4 * Most Likely) / 6
  • Example:
  Risk 1 Risk 2 Risk 3 Aggregate
Probability 90% 50% 20%  
Consequence (min.) $5 M $1 M $2 M  
Consequence (max.) $20 M $10 M $5 M  
Consequence (most likely) $10 M N/A $3 M  
Expected impact of risk using VDOT formula 0.90 X $65M / 6
= $9.75 M
0.50 X $11M / 2
= $2.75 M
0.20 X $19M / 6
= 1.11 M
$9.75 M + $2.75 M + $1.11 M
= $13.61 M

Probabilistic Analysis

  • Monte Carlo simulation
    • Simulation of large number of scenarios based on probabilities of risk occurrence and probabilities of magnitude of risk impact
  1. Select distribution type (normal, lognormal, triangular, flat or discrete) for each risk's impact;
  2. Determine the impact levels (most likely, minimum, maximum);
  3. Run simulation using risk software;
  4. Determine aggregate risk valuation for desired confidence level.

1. Select Risk Impact Distribution Type

Risk Impact distribution graphic

2. Determine Probability & Impact Levels

  • Example:
  Risk 1 Risk 2 Risk 3
Probability 90% 50% 20%
Consequence (min.) $5 M $1 M $2 M
Consequence (max.) $20 M $10 M $5 M
Consequence (most likely) $10 M N/A $3 M
Type of probability distribution of consequence Triangular Uniform Triangular

3.  Run Simulation

  • P3-VALUE simulation:

Generate Outputs simulation screen 
shot

4. Determine Aggregate Impact

  • Impacts for various confidence levels can be estimated

Estimate of confidence levels, screen shot

Aggregate Impact - Graphical

Graphical  view of Aggregate Impact

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 unidentified risks
  • Avoiding double-counting of risks
    • Project risks in cash flows 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:
A deterministic (formula-based) risk valuation can provide varying estimates of aggregate risk values, from which an  analyst can choose depending on the confidence level desired by decisionmakers.

Questions?

Submit a question using the chat box

Lesson 4 - Risk Allocation

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

Typical Risk Allocation

Risk Design-Bid-Build Availability Payment P3 Toll Concession P3
Design Errors Public Contractor Contractor
Change in Scope Public Public Public
Delay in permits Public Shared Shared
Delay in right-of-way acquisition Public Public Public
Construction cost overruns Contractor Contractor Contractor
Construction risks Contractor Contractor Contractor
Archeological findings Public Public Public
Delay in relocation of cables and pipes Public Contractor Contractor
Unknown ground conditions Public Contractor Contractor
Hazmat Public Shared Shared
Security Public Contractor Contractor
Major maintenance cost overruns Public Contractor Contractor
Snow and ice removal cost overruns Public Contractor Contractor
Regular maintenance Public Contractor Contractor
Traffic information systems Public Public Public
Incident management Public Contractor Contractor
Toll revenue risk Public Public Contractor
Financing risks Public Contractor Contractor
Force majeure Public Shared Shared

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

Risk Allocation Steps

Step 1: "Likelihood" First, risk should be allocated to the party best able to control the likelihood of the risk occurring.
Step 2: "Impact" Second, risk should be allocated to the party best able to control the impact of the risk on project outcomes.
Step 3: "Lowest Cost" Third, risk should be allocated to the party best able to absorb the risk at lowest cost if the likelihood and impact cannot be controlled

Financial Impact of Risk Transfer

Chart showing Cost and Risk Contingency Reduction

Port of Miami Tunnel
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 all risks to the private partner in a P3.

Questions?

Submit a question using the chat box

Lesson 5 - Risk and Value for Money Analysis

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 Steps

  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 -$20.60 -$10.30 -$10.30
Year 2 cash flow impact -$74.30 -$37.10 -$37.10
Year 3 cash flow impact -$10.90 -$5.50 -$5.50
Opportunities (positive risks)  -- --  
Year 4 cash flow impact     +$11.30
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-Toll
Threats (negative risks)      
Year 1 cash flow impact -$19.60 -$9.80 -$9.80
Year 2 cash flow impact -$67.40 -$33.70 -$33.70
Year 3 cash flow impact -$9.40 -$4.70 -$4.70
Subtotal  -$96.40 -$48.20 -$48.20
Opportunities (positive)       
Year 4 cash flow impact     +$9.30
Year 23 cash flow impact     +$6.40
Subtotal for 20 years     +$155.20
Present value of risks -$96.40 -$48.20 +$107.00

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

Chart showing risks for PSC, P3-Availability, and P3-Toll

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
  • I don't know

Questions?

Submit a question using the chat box

Lesson 6 - Using the P3-VALUE Risk Assessment Tool

Accessing the Risk Assessment Tool

P3-VALUE Tools

P3 Value Tools with "Risk Assessment" highlighted

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

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

P3-VALUE Tool

  • Risk Register

Sample text of Risk Register tool

  • Qualitative Risk Assessment

Sample Qualitative Risk Assessment table

  • Quantitative Risk Assessment

Quantitative Risk Assessment sample table

  • Risk Allocation & Mitigation

Sample Allocation table

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

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 Analysis and Valuation

Lesson 4 - Risk Allocation

Lesson 5 - Risk and Value for Money Analysis

Lesson 6 - Using the P3-VALUE 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 Training

October 4: Office Hours: Risk Assessment Homework Review

October 29-30: Advanced P3 Evaluation Pilot Training*

January 23: Value for Money Analysis 201

February 21: Office Hours: VfM Homework Review

March 13: P3 Financial Structuring & Assessment

April 18: Office Hours: Financial Assessment Homework Review

To register for the P3-VALUE webinars, please visit http://www.nhi.fhwa.dot.gov/resources/webconference/eventcalendar.aspx

*To register for the two-day workshop, please visit
http://152.122.41.186/IPDRegistration/regional.asp

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