Instructors
Patrick DeCorla-Souza
P3 Program Manager
Center for Innovative Finance Support
![Patrick DeCorla-Souza](/ipd/images/p3/toolkit/p3-value_webinar_4/decorlasouza.png)
Marcel Ham
Vice President
IMG Rebel
![Marcel Ham](/ipd/images/p3/toolkit/p3-value_webinar_4/ham.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/impacts.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide9.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide12.png)
View
larger version of the Project Risks chart
Risk through Project Completion
![Chart - Risk through Project Completion](/ipd/images/p3/toolkit/p3-value_webinar_4/slide13.png)
View
larger version of the Risk through Project Completion chart
Risk over Project Life
![Table - Risk over Project Life](/ipd/images/p3/toolkit/p3-value_webinar_4/slide14.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide18.png)
1. Risk Identification
Risks:
Risk Workshops
- Who?
- Facilitator
- Subject matter experts
- What tools are used?
- Risk checklist
- Risk register
![Step 1. Identification](/ipd/images/p3/toolkit/p3-value_webinar_4/slide19.png)
2. Risk Assessment
- Probability
- Potential consequences
- Cost
- Schedule
- Scope/Quality
- Revenue
- Value
![Step 2. Risk Assessment](/ipd/images/p3/toolkit/p3-value_webinar_4/slide20.png)
3. Risk Response Planning
Risk Response Strategies
- Avoid
- Mitigate
- Transfer/Share
- Accept
![Step 3. Risk Response Planning](/ipd/images/p3/toolkit/p3-value_webinar_4/slide21.png)
4. Risk Allocation
![Step 4. Allocation](/ipd/images/p3/toolkit/p3-value_webinar_4/slide22.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide23.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide27.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide29.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide31.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide32.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide35.png)
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:
- Using a market-based weighted average cost of capital (WACC)
that excludes revenue risk (Availability Payment WACC)
- 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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide41.png)
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:
- Using a market-based weighted average cost of capital (WACC)
that includes revenue risk
- 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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide44.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide46.png)
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
![](/ipd/images/p3/toolkit/p3-value_webinar_4/slide53.png)
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](/ipd/images/p3/toolkit/p3-value_webinar_4/slide58.png)
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
Training
Navigator User Interface
![Training Navigator User Interface](/ipd/images/p3/toolkit/p3-value_webinar_4/slide60.png)
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