Identifying Risks

The first step toward structuring the PPP is often to put together a comprehensive list of all the risks associated with the project. Such a list is known as a risk register. In this context, a risk is an unpredictable variation in the project's value—from the point of view of some or all stakeholders—arising from a given underlying risk factor. For example, demand risk is the risk that the project value, and project revenues, will be lower (or higher) than expected because demand for the output is lower (or higher) than expected. Irwin's book on PPP guarantees and risk defines risk in more detail (Irwin 2007).

PPP risks vary depending on the country where the project is implemented, the nature of the project, and the assets and services involved. Nonetheless, certain risks are common to many types of PPP project. These are usually grouped into risk categories that are often associated with a particular function (such as construction, operations, or financing), or with a particular project phase (such as termination), as discussed in PPP Risk Categories.

Many resources provide standard risk lists and preferred risk allocations, in some cases for specific project types. Several examples are provided in Allocating Risks. These standard lists can be useful resources when identifying project risks for a particular PPP. However, PPP projects often have unique features or circumstances—for example, the specific geological conditions on the route of a proposed road. This means that implementing agencies should make use of experienced advisors to help identify a comprehensive list of project risks.

Assessing and prioritizing risks

To focus efforts when allocating risks, it is often helpful to consider their importance. Some risks will be more significant than others in terms of likelihood and severity of impact on project outcomes, or both. Risk can be assessed either quantitatively or qualitatively.

The Infrastructure Australia guidance note on calculating the PSC (AU 2016a, 84–109) provides detailed guidance both on identifying risk, and using various quantitative techniques to evaluate risks. An ADB handbook for risk analysis in project evaluation (ADB 2002, 9–28) also includes a chapter describing quantitative techniques for assessing risk. PFRAM, the PPP Fiscal Risk Assessment Model (IMF and WB 2016) designed by the IMF and the World Bank, identifies a large set of risks that may have a fiscal impact.

In practice, many implementing agencies take a more qualitative approach at this stage. Guidance on risk management by the Victoria Managed Insurance Authority (VIC 2015, 79–83) provides helpful guidance on a risk heat map—a qualitative risk assessment approach, in which risks are categorized according to their likelihood of occurrence, and impact. Farquharson et al (Farquharson et al. 2011, Appendix B) provides an example ‘risk register’ for a PPP project, which also takes a qualitative approach. Each risk is categorized as being low, medium, or high for both risk status (likelihood) and impact. Most effort should be directed to managing those risks identified as being both high likelihood, and high impact.

Mitigating risks

After full identification of project risks, a mitigation process should occur—wherein, based on a cost-benefit analysis, some project characteristics or procedural steps may be adjusted. For instance, additional geological surveys or traffic studies may be conducted before the tender to reduce uncertainty and contain bidding costs. Performance requirements that are not critical to project success and may create unacceptable risk to private operators may be eliminated.