Probabilistic time-specific risk load for PPP

Abstract

Risk allocation is crucial for the success of a Public Private Partnership project. When looking for the optimal risk allocation, the risk-bearing capacity of the private party needs to be considered. The risk-bearing capacity is ensured if the risk coverage exceeds the risk load at all times during the contract phase. This paper presents a probabilistic approach that refines a simulation for the aggregation of a project’s risk load using time-related information from subjective expert estimations. In the process, the concept of time-specific risk impact and risk periodicity is integrated in a Monte Carlo simulation model. In the simulation, the impact of single risk events is allocated to time units according to the underlying time-related random variables. The result is an “empirical” distribution function of the project’s risk load resulting from the simulated artificial statistical data base for either just one specific point in time or the cumulative project’s risk load until that specific point in time. The time-specific project risk load can be used to assess, if the private party is able to provide risk-bearing capacity and to determine the necessary financial risk coverage at this point in time.