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Risk Assessment for Public-Private Partnerships: A Primer

January 2014
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Chapter 7: Summary

Risk is a key characteristic of P3s, influencing project structure and cost, and the assessment of risk is a critical task in developing, negotiating, evaluating, and managing P3 projects. Risk assessment assists in overall project evaluation, supports the design of technical requirements and commercial terms prior to procurement, assists in negotiations with proposers with regard to the allocation of risk, and is a prerequisite in the development of risk management plans.

Under the conventional DBB procurement process, public agencies typically retain a significant portion of the risks associated with a project. When public agencies take on major projects under the conventional procurement process, they tend to undervalue those retained risks. As a result, budget and schedule estimates are often optimistic, and the full life-cycle costs of a project are rarely considered. P3s derive much of their value by structuring contract agreements to transfer to the private sector many of the risks that are conventionally retained by the public sector.

P3 procurement processes require a transparent accounting and valuing of risks, because the risks transferred to the private sector will generally be factored into the costs of bids as a risk premium. To ensure the best value for the public, the procuring agency needs to perform a thorough risk analysis to determine which risks it should manage internally and which risks it should transfer to the private sector.

Risks are identified and assessed through workshops, that is, formal meetings where project team members, subject matter experts, and others responsible for estimating the costs and schedule of a project work together to identify and analyze risks. Risk workshops result in a "risk register" that describes significant risks, assessments of risk probability and impact, and preliminary risk response plans.

Agencies may use the risk register to assign a monetary value to each risk. This can help a public agency decide which risks to transfer to the private sector, which to retain, and which to share. By calculating the NPV of the risks transferred to the private sector under a P3 procurement model, a public agency can compare the risk-adjusted NPC of procuring the project under the conventional procurement method to that of a P3 procurement in order to assess value for money. A key criticism of risk valuation pertains to the validity of the calculations. A sensitivity analysis to test the effect of key assumptions is therefore essential.

The goal of a P3 is not to transfer all project risks, rather it is to transfer those risks that the private sector can manage most efficiently and that meet the overall goal of the project. For each risk transferred, there is a premium that the project owner must pay to the private entity. A risk may be priced differently by the public and the private sector, depending on their capabilities. It may be financially inefficient to transfer risks that the private sector will have a difficult time managing.

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