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Risk Assessment for Public-Private Partnerships: A Primer

January 2014
Table of Contents

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Chapter 1 - Introduction

The Federal Highway Administration's (FHWA's) Center for Innovative Finance Support (formerly Innovative Program Delivery) assists States and local governments in developing knowledge, skills, and abilities in innovative finance techniques. Public-private partnerships (P3s) are one form of innovative finance. The Center for Innovative Finance Support supports the research and development of tools to facilitate consideration and implementation of P3s, assists in building the capacity of practitioner communities, develops and implements Federal policy on P3s, and collaborates with State and local partners to communicate the various aspects of P3s to elected officials, transportation leaders, and the public.

A key Center for Innovative Finance Support activity is the development of a series of primers to (a) assist in understanding P3s, (b) provide key considerations in establishing a P3 program, and (c) show how to compare a P3 procurement option with the conventional approach. This primer is part of the series. Supporting guides and a training program are also being developed. Other primers and a variety of P3 resources are available via the section devoted to P3s on the Center for Innovative Finance Support's Web site at

This primer addresses the issue of risk assessment for P3s. Companion primers on the topics of Value for Money (VfM) analysis and financial assessment for P3s are also available as part of this P3 primer series. P3s, risk assessment, and VfM analysis are briefly described in the following sections.

What Are Public-Private Partnerships?

P3s for transportation projects have been drawing much interest in the United States for their ability to access new financing sources and to transfer certain project risks. P3s differ from conventional procurements in which the public sponsor controls each phase of the infrastructure development process - design, construction, finance, and operations and maintenance (O&M). With a P3, a single private entity (which may be a consortium of several private companies) assumes responsibility for more than one development phase, accepting risks and seeking rewards.

Design-build (DB) procurement - under which private contractors are responsible for both designing and building projects for a fixed price - is considered by some to be a basic form of P3. Further along the P3 spectrum, the private sector may also assume responsibility for finance and O&M, typically via a long-term concession (e.g., 30 years or more) from the public sponsor. This document, as well as the series of FHWA primers on P3s, is concerned primarily with forms of P3s in which the private sector partner (called the concessionaire) enters into a long-term contract to perform most or all of the responsibilities conventionally procured separately and coordinated by the government.

Public agencies pursue P3s for a variety of reasons, including access to private capital, improved budget certainty, accelerated project delivery, transfer of risk to the private sector, attraction of private sector innovation, and improved or more reliable levels of service. P3s, however, like conventional projects, require revenue to pay back the upfront investment. P3s are complex transactions, and determining that a P3 is likely to provide a better result than would a conventional approach is not simple. There are many factors that must be considered when determining the best procurement approach for a given project, including long-term costs, myriad uncertainties, risks both now and in the future, and complicated funding and financing approaches. 1 Public agencies may conduct VfM analyses to compare a P3 approach with a conventional approach.

Public-Private Partnerships and Risk Assessment

Project risk must be identified, evaluated, and managed throughout a project's life for the project to be successful. Management of risks requires a public agency to proactively address potential obstacles that may hinder project success, as well as take advantage of opportunities to enhance success or save costs. P3s are considered to be a form of risk management as the public sector and private sector parties seek to achieve optimal risk allocation, thus allowing for the management of risks by the party best able to handle them.

Project risk management is an iterative process that begins in the early phases of a project and is conducted throughout the project's life cycle. It involves systematically considering possible outcomes before they happen and defining procedures to accept, avoid, or minimize the effect of risk on the project. Under a P3 transaction, risk allocation tends to be "by exception," so the concession agreement contains a finite list of "relief events" and "compensation events" that are tightly drafted and highly constrained. Everything else is allocated to the concessionaire. In contrast, under a conventional delivery approach, if a circumstance or situation arises that had not been contemplated up front, that risk (whether or not it could have been foreseen) is owned by the public sector. 2 Risk management follows a clearly identified process, which includes:

  • Risk identification.
  • Risk analysis.
  • Risk response planning (including transfer of risks to the private sector).
  • Risk monitoring, controlling, and reporting.

Risk analysis is used in the development of a P3 project for a number of reasons:

  • To develop agreement provisions that optimize value for money (discussed in chapter 6).
  • To calculate risk adjustments as part of value for money assessments.
  • To help determine project contingency amounts.
  • To identify and monitor mitigation actions (i.e., risk management).

Note, however, that P3s may be used to manage not only construction risk, but also to address pre-construction (development phase) risks, financial risks, and risks related to the project's life cycle.

Structure of This Primer

This primer is structured as follows: How the extent of risk transfer varies by type of project and type of P3 contract is discussed in chapter 2. The key types of risks faced in P3 projects are outlined in chapter 3. The analysis of project risks to assess their cost impacts is discussed in chapter 4, and how risks are optimally allocated between the public and private sectors to minimize total project life-cycle costs is explained in chapter 5. In chapter 6, there is a discussion of how costs of risks under conventional and P3 procurements may be incorporated into VfM analyses, which is often used to compare the two procurement options, and a summary and conclusion are provided in chapter 7.


1. For more information on P3s, refer to FHWA's primer, Public-Private Partnership Concessions for Highway Projects: A Primer, available at

2. For more information on the risk management process for construction, refer to FHWA's Guide to Risk Assessment and Allocation for Highway Construction Management, available at Another useful resource is the Transportation Research Board's Guidebook on Risk Analysis Tools and Management Practices to Control Transportation Project Costs (NCHRP Report 658), available at

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