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P3 VALUE 2.0 Webinars
Session 4: P3 Project Risk Assessment

March 07, 2016
Related Materials

Instructors

Patrick DeCorla-Souza
P3 Program Manager
Center for Innovative Finance Support

Patrick DeCorla-Souza

Marcel Ham
Vice President
IMG Rebel

Marcel Ham

P3-VALUE 2.0 Webinars

  • P3: Public Private Partnership
  • P3-VALUE 2.0: Analytical tool to help practitioners understand processes used to quantitatively evaluate P3 options
  • This is one of a series of webinars on P3-VALUE
    • P3 Evaluation Overview (January 25, 2016)
    • Value for Money Analysis (February 8, 2016)
    • Value for Money Exercise (Feb. 16, 2016)
    • Project Delivery Benefit-Cost Analysis (Feb. 22)
    • Project Delivery BCA Exercise (Feb. 29, 2016)
    • Risk Valuation (today)
    • Financial Viability Assessment

Webinar Outline

Part 1 - Categorizing Risk

Part 2 - Risk Management Process

Part 3 - Pure Risk Assessment

Part 4 - Lifecycle Performance and Revenue Uncertainty Risk Assessment

Part 5 - Risk Allocation

Part 6 - Using P3-VALUE 2.0 for Risk Assessment

Summary

Webinar Objectives

After taking this course you should be able to:

  • Categorize P3 risks
  • List the steps in the risk management process
  • Explain the methods for quantifying and monetizing various type of risks
  • Describe the risk allocation process
  • Use P3-VALUE 2.0 to perform risk assessment

Part 1 - Categorizing P3 Risks

Purpose of Risk Assessment

  • To calculate value of risks
  • To design draft agreement for RFP
  • To assist in negotiation with bidders
  • To develop risk management plans

Financial Impacts of Project Risks

Venn Diagram - Financial Impacts of Project Risks

Costs

  • Increase in expenses
    • Construction
    • O&M
    • Major maintenance

Delays

  • Effects of delays
    • Additional costs
    • Cost escalation
    • Lost revenues
    • NPV effect

Revenues

  • Loss in revenues
    • Delay: foregone toll/AP revenues
    • Traffic: Lower than expected revenues

Categories of Risk

Flow chart - Categories of Risk

View larger version of the Categories of Risk flow chart

P3-VALUE 2.0 Project Risk Categories

  • Base Variability
    Example: Uncertainty in volume of asphalt
  • Pure Risks
    Example: Accident at construction site, causing cost overrun and/or delays
  • Lifecycle Performance Risks & Revenue Uncertainty
    Example: Conflicts between DB and O&M contractors, supervening events exceeding liability caps, inflation, T&R risk (for toll concessions)

Valuing Base Variability

  • Typically a percentage of costs (+ or - variation)
  • May differ by project phase
  • Reflects the uncertainty in cost estimates - will reduce as the design level becomes more detailed
  • P3-VALUE 2.0 uses a factor (percentage of base cost) to estimate cost impact
  • Example:
    • Base variability: 20% of construction cost
    • Construction cost: $200M
    • Value of base variability: 20% X $200M = $40M

Who Bears Project Risks in a P3?

Includes both systematic and some non-systematic risks

Flow Chart - Project Risks

View larger version of the Project Risks chart

Risk through Project Completion

Chart - Risk through Project Completion

View larger version of the Risk through Project Completion chart

Risk over Project Life

Table - Risk over Project Life

View larger version of the Risk over Project Life chart

Audience Feedback

True or False

  • All project risks are pushed down to subcontractors of the concessionaire.

Questions?

Submit a question using the chat box

Part 2 - Risk Management Process

Risk Management Flow Chart

1. Risk Identification

Risks:

  • Threats
  • Opportunities

Risk Workshops

  • Who?
    • Facilitator
    • Subject matter experts
  • What tools are used?
    • Risk checklist
    • Risk register

Step 1. Identification

2. Risk Assessment

  • Probability
  • Potential consequences
    • Cost
    • Schedule
    • Scope/Quality
    • Revenue
  • Value

Step 2. Risk Assessment

3. Risk Response Planning

Risk Response Strategies

  • Avoid
  • Mitigate
  • Transfer/Share
  • Accept

Step 3. Risk Response Planning

4. Risk Allocation

  • Transfer or retain
  • Share

Step 4. Allocation

5. Risk Monitoring & Control

  • Performance metrics to monitor risk
  • Understand P3 risk management provisions
  • Avoid taking back transferred risks
  • Validate previous risk identification, risk assessment, and risk response planning

Step 5. Monitoring and Control

Audience Feedback

True or False

  • The probability and potential consequences of a specific risk must be quantified in order to estimate its cost impact

Questions?

Submit a question using the chat box

Part 3 - Pure Risk Assessment

Chart - Risk Assessment

View larger version of the Risk Assessment flow chart

Qualitative Assessment

  • Probability of risk occurrence
    • Very low
    • Low
    • Medium
    • High
    • Very high
  • Scale of impact if risk occurs
    • Very low
    • Low
    • Medium
    • High
    • Very high

Qualitative Assessment Matrix

Example

Example Table - Qualitiative Assessment Matrix

View larger version of the example Assessment Matrix table

Quantitative Assessment

  • Probability of risk occurrence
    • % probability (0% - 100%)
  • Scale of impact if risk occurs
    • Dollar amount or number of days of delay

Valuing Pure Risks (Formula-Based)

  • Risk Value = Probability X Impact (distribution)
  • Example for uniform probabilistic impact distribution:
    • Probability of occurrence: 10%
    • Minimum impact: $2M
    • Maximum impact: $4M
    • Value = 10% x ½ x ($2M + $4M) = $0.3M

Chart: Continuous Distribution: Uniform

Valuing Pure Risks (Formula-Based)

  • Risk Value = Probability X Impact (distribution)
  • Example for triangular impact distribution:
    • Probability of occurrence: 10%
    • Minimum impact: $2M
    • Maximum impact: $4M
    • Most likely impact = $3.5
    • Value = 10% x ($2M + 3.5 + $4M)/3 = $0.32M

Chart - Continuous Distribution: Triangular

Aggregate of Pure Risks

  • Central limit theorem can be used if pure risks are independent:
    • Distribution of the sum of a sufficiently large number of independent random variables is approximately normal
  • To apply central limit theory, variance and mean value of each individual risk must be calculated and added

Central Limit Theorem Applied

Example using uniform risk distributions (P3-VALUE 2.0)

Risk Item Probability A Most likely Impact B Most likely value C = A x B Minimum value D Maximum
value E
Shape
Risk 1 20% $10,000k $2,000k -20% +50% Uniform
Risk 2 25% $4,000k $1,000k -20% +50% Uniform
Risk 3 50% $4,000k $2,000k -20% +50% Uniform
Risk Item Minimum value F = C - D% Maximum value G = C + E% Mean value* H = ½ x (F + G) Variance*
I = (G - F) 2 / 12
Risk 1 $1,600k $3,000k $2,300k $163,333k
Risk 2 $800k $1,500k $1,150k $40,833k
Risk 3 $1,600k $3,000k $2,300k $163,333k
Total $4,000k $7,500k $5,750k $376,500k
  • Mean value: $5,750k, standard deviation of $606k
  • Using Excel NORMINV function, P70 risk value: $6,068k

Valuing Pure Risks (Monte Carlo)

Monte Carlo simulation

  • Simulation of large number of scenarios based on probabilities of risk occurrence and probability distribution of magnitude of impact
  • Result is a probability distribution of aggregate risk value
  • Provides estimates at confidence levels

Charts - Monte Carlo simulations

View larger version of the Monte Carlo simulation charts

Audience Feedback

True or False

  • The aggregate impact of pure risks on costs may be estimated either by using a formula-based method or by using Monte Carlo simulation.

Questions?

Submit a question using the chat box

Part 4 - Assessment of Lifecycle Performance Risk and Revenue Uncertainty Adjustment

Valuing Lifecycle Performance Risks

Ways to value lifecycle performance risk

  • Use information available to Agency on lifecycle performance risk costs/cash flows
  • Use market-based P3 financing conditions as a proxy to determine the value of lifecycle performance risk

Market-based valuation:

  • Calculate NPV of cost cash flows*, excluding financing:
    1. Using a market-based weighted average cost of capital (WACC) that excludes revenue risk (Availability Payment WACC)
    2. Using project risk-free discount rate
  • Calculate difference in NPVs (Δ = A - B )

* Use PSC cash flows for PSC lifecycle performance risk, and P3 cash flows for P3 lifecycle performance risk (used only in PDBCA and risk outputs)

Lifecycle Performance Risk Valuation

Chart - Lifecycle Performance Risk Valuation

View larger version of the Lifecycle Performance Risk Valuation chart

Valuing Revenue Uncertainty

Ways to value revenue uncertainty

  • Apply percentage haircut to P50 traffic/revenues
  • Use market-based P3 financing conditions as a proxy to determine the value of revenue uncertainty

Market-based valuation:

  • Calculate NPV of revenue and cost cash flows, excluding financing:
    1. Using a market-based weighted average cost of capital (WACC) that includes revenue risk
    2. Using project risk-free discount rate
  • Calculate difference in NPVs (Δ = C - D), which equals the lifecycle performance risk and revenue uncertainty adjustment combined
  • NPV of revenue risk is the difference between this Δ and the lifecycle performance risk calculated previously

Revenue Uncertainty Adjustment

Chart - Revenue Uncertainity Adjustment

View larger version of the Revenue Uncertainty Adjustment chart

Accounting for Risk in P3-VALUE 2.0

Risk Type VfM PSC VfM P3 PDBCA PSC PDBCA P3
Base variability
Pure risk
Lifecycle performance risk  
Revenue risk      

Risk Analysis Challenges

Venn Diagram - Risk Analysis Challenges

View larger version of the Venn Diagram of Risk Analysis Challenges

  • Estimating risk impacts and probabilities
  • Bias of evaluators
  • Accounting for procurement phase risks that are unique to P3s
  • Accounting for correlation among risks
  • Accounting for unidentified risks
  • Aggregating low probability/low consequence risks
  • Avoiding double-counting of risks

Test Your Knowledge

True or False

  • The WACC for a toll concession includes a risk premium that accounts for revenue risk as well as for lifecycle performance risks

Questions?

Submit a question using the chat box

Part 5 - Risk Allocation

Risk Transfer by Delivery Type

Procurement Type Design Risk Construction Risk Financial Risk O&M Risk T&R Risk
Design-Build (DB)      
Design-Build-Finance (DBF)    
Design-Build-Finance-Operate-Maintain (DBFOM) with Availability Payment  
Design-Build-Finance-Operate-Maintain (DBFOM) with Toll Concession

Typical DBFOM Risk Allocation

Risk Design-Bid-Build Availability Payment DBFOM Toll Concession DBFOM
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 & pipes Public Contractor Contractor
Unknown ground conditions Public Contractor Contractor
Hazardous materials Public Shared Shared
Security Public Contractor Contractor
Major maintenance cost overruns Public Contractor Contractor
Snow & 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 Allocation Steps

Step 1: Likelihood Which party is best able to control the likelihood of the risk occurring?
Step 2: Impact Which party is best able to control the impact of the risk?
Step 3: Lowest Cost Which party is best able to absorb the risk at lowest cost if the likelihood and impact cannot be controlled?

Transferred Risks

  • Transferred risks include risks pushed down to subcontractors
  • Efficient P3 risk management may reduce overall risk valuation and contingencies

View larger version of the Transferred Risks chart

Example Tunnel Project

Risk Category Risk Allocation
Public Private Shared
Political    
Financial    
Traffic and Revenue    
Right of Way    
Planning and Permitting    
Utilities    
Procurement    
Construction    
Operations and Maintenance    
Handback    
Force Majeure    
Change in Law    
Geotechnical    

Test Your Knowledge

True or False

  • The public agency's goal in risk allocation should be to transfer all risks to the private partner in a P3.

Questions?

Submit a question using the chat box

Part 6 - Using P3-VALUE 2.0 for Risk Assessment

FHWA's P3-VALUE 2.0

FHWA's P3-VALUE 2.0 process

View larger version of the P3-VALUE 2.0 process chart

Training Modules

  • Value for Money Analysis
  • Project Delivery Benefit-Cost Analysis
  • Risk Assessment
  • Financial Viability Assessment

Available training modulesTraining Navigator User Interface

Training Navigator User Interface

View larger version of the User Interface screen

Demonstration of Risk Module

Please stand by as we open the Excel file

Questions?

Submit a question using the chat box

Webinar Summary

Webinar Recap

Part 1 - Categorizing Risk

Part 2 - Risk Management Process

Part 3 - Pure Risk Assessment

Part 4 - Lifecycle Performance and Revenue Uncertainty Risk Assessment

Part 5 - Risk Allocation

Part 6 - Using P3-VALUE 2.0 for Risk Assessment

Tools and References

Upcoming P3-VALUE Training

Exercise review - March 14 at 12:30pm EST

  • March 21 Financial Viability Assessment
  • Exercise instructions may be downloaded from the web room
  • Technical assistance options:
  • To access the Exercise Review webinar, please use the following link and telephone number:
  • Link: https://connectdot.connectsolutions.com/p3
  • Telephone: 1-888-363-4749, Passcode: 6139168#

Resources

FHWA's Center for Innovative Finance Support Website:
https://www.fhwa.dot.gov/ipd/

P3 Website:
https://www.fhwa.dot.gov/ipd/p3/

Questions?

Submit a question using the chat box

Contact Information

Patrick DeCorla-Souza
P3 Program Manager
Center for Innovative Finance Support
Federal Highway Administration (202) 366-4076
Patrick.DeCorla-Souza@dot.gov

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