Risk Management in PublicPrivate Partnerships, Value for Money and the Public Sector Comparator

Seoul October 2007

Anthony Smith Farne Project Consultancy

Risk Management in PPPs

What is risk?:
Oxford English Dictionary defines risk as a chance or possibility of danger, loss, injury etc. Other definitions:
Lack of predictability about structure, outcome or consequences in decision or planning situations the chance of something happening that will have an impact on objectives

Risk Management in PPPs

Risk can be characterized by 3 factors:
The Event: the possible occurrence which would affect the achievement The Likelihood of the event happening The impact of the event occurring (financial, social etc.)

Methods of risk management

Identify the risk Assess the risk: qualitative and quantitive Respond to the risk:
Avoidance Prevention Transfer:
basic principle: the risk should be borne by the party best able to manage it.

Retention Reduction

Risk in stages of PPP

Engineering and Construction Phase
The stage when the project is subject to the highest level of risk.

Start Up Phase
Construction and completion risks are over but commissioning and settling down to provision of the services means that the risk here is higher than during the rest of the operations phase e.g. testing, marketing and staffing

Operations Phase
The period of the project with the least risks

Risk Management associated with Infrastructure PPPs

Land acquisition risk Planning risk: cost of obtaining, risk of delay or rejection or unsatisfactory conditions imposed; Design risk: changes in design by SPV/ Authority; Construction Risk: incorrect time estimates, unforeseen ground conditions, failure to obtain services, protestor action;

Risk management associated with Infrastructure PPPs

Operational Risks:
Demand Risk:
Transport/tourism/defence Government service infrastructure (education/health etc.)

fitness for purpose of plant and equipment Latent defects in new build/existing buildings Changes in specification by Authority Performance of sub-contractors Relief events Force Majeure events Termination

Risk management associated with Infrastructure PPPs

Operational Risks (continued):
Obtaining/maintaining licences and consents. Sub standard plant operation Lifecycle maintenance costs Changes in law Non performance of the services Third Party Income levels Authority default: compensation/termination

Risk management associated with Infrastructure PPPs

Residual Value Risks:
Decontamination Will Authority require the asset at the end of the contract term? Disposal of surplus operational plant and equipment

Financial Risks:
Inflation Insurance premium rises Interest rates before/after financial close

Risk management associated with Infrastructure PPPs

Performance risks:
Failure to meet performance standards Availability of facilities

Technology /obsolescence risk

Value for Money

Definition: The optimum combination of whole life

costs and quality. This does not mean the cheapest!

Value for Money

VfM best achieved by:
Reducing cost and time of procurement Improving project, contract and asset management Competition: using competitive procurement:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Assessing the need for goods and services Producing specification of requirements Agreeing potential list of suppliers Issuing invitation to tender Evaluating and refining bids received Identifying preferred bidder Agreeing form of contract Appointing provider Evaluating performance of contract Providing feedback for future contracts

Value for Money

Make use of size of government purchasing power:
Use of strategic alliances/ central procurement agencies Use of framework agreements

Use of continuous improvement:

On a project specific basis (e.g. ratcheting performance mechanism/ benchmarking/ market testing By using the feedback procedure for future projects and spreading best practice to other departments

Using best procurement process:

Public sector comparator

VfM: the Public Sector Comparator

Public Sector Comparator (PSC) is a comparison of the hypothetical cost to government of a project implemented by the Public Sector and the cost of providing the same using the Private Sector. Purpose of the PSC:
to ensure that the method of procurement gives the best value for money for a project To promote full cost pricing at an early stage in the project To assist in the management of the procurement process To provide a reliable means of demonstrating VfM To provide a consistent benchmarking and evaluation tool To encourage bidding competition

VfM: the Public Sector Comparator

PSC = Transferable risk + Competitive neutrality + Raw PSC + Retained Risk Where:
Transferable risk = the value of the risk transferred to the bidder Competitive neutrality= the value of the net competitive advantage that a government business has due to its public ownership Raw PSC = the total of all capital and operating costs (both direct and indirect) that would be incurred if the public sector were to carry out the project Retained Risk = the value of any risk that is not to be transferred to the bidder

VfM: the Public Sector Comparator

In order to construct the PSC, a PSC Reference Project is identified. This is the most likely and efficient form of public sector delivery of the project that would satisfy all elements of the output specification. The reference project should:
Reflect the most likely (and achievable) form of procurement approach Provide the same level and quality of service as is expected of the bidder to enable a like for like comparison Be framed to be a conforming bid as if it were part of the bidding process

Thanks
Anthony Smith Farne Project Consultancy PPP/PFI Project Consultants
Anthony.lawsmith@googlemail.com Tel: 0044 1234 708930 Mob: 0044 794 088 5730