Chapter 14 - Risk Evaluation and Transfer

Abstract

Risk in a public–private partnership (PPP) relates to uncertain outcomes which have a direct effect either on the provision of the services, or the financial viability of the project. In either case the result is a loss or cost which has to be borne by someone, and one of the main elements of PPP structuring is to determine where this loss or cost will lie. This chapter summarizes the basic principles which lie behind risk transfer in PPP projects, and then reviews the application of these principles in detail, using the "Risk Matrix" approach used by all parties to identify and evaluate risks at each phase of the project. Risk transfer is important for the Public Authority, as it is at the heart of the VfM case for a PPP procurement. Setting aside balance-sheet issues, the main purpose of risk transfer from the public-sector point of view is to ensure that the Project Company and its investors are appropriately incentivized to provide the service which is the subject of the PPP Contract. Risk assessment by lenders is based as much on the financial impact that a particular risk may have on the project's viability as on the likelihood of it actually happening. So a "low possibility/high impact" risk, one which the Public Authority or the Sponsors feel is highly unlikely, will still be of concern to lenders. This means that the lenders assess risk by a series of "worst-case" sensitivities, an analysis which is quite different from the weighting of risks which the Public Authority may undertake when considering VfM.