Abu Dhabi   Bahrain       ΛTKINS                      Dubai   Kuwait   Oman   Qatar   Saudi Arabia   India
ΛTKINS                                         ΛTKINS                                       Management                    ...
ΛTKINS                              Agenda•   Overview: a Process not a Spreadsheet•   Setting the Context•   Risk Types a...
ΛTKINSRisk Management – a Process not a Spreadsheet            • Identify motives for PPP            • Perceptions become ...
ΛTKINS            Setting the Risk Management Context     Perceptions become Reality                   Multiple PPP Object...
ΛTKINS              Survey of Financiers Perceptions of Risks   Top Risks for Equity Providers                  Top Risks ...
ΛTKINS     Survey of Financiers Perceptions of Risk Transfer      Pre-Operational Phases                                 O...
ΛTKINS                 Case I: Power Due Diligence, TurkeyPre-financial Close                              Operational Pha...
ΛTKINS                          Identify Risks by Type   Political Risks     Commercial Risks      Financial Risks      Ec...
ΛTKINS                       Sample Political Risks       Phase           Risk                    Source   Mitigation/Allo...
ΛTKINS                    Sample Commercial Risks       Phase           Risk                   Source         MitigationDe...
ΛTKINS                        Sample Financial Risks       Phase            Risk               Source        Mitigation/Al...
ΛTKINS                       Sample Economic Risks       Phase            Risk                Source    Mitigation/Allocat...
ΛTKINS     Case II: Dublin Metro, Lifecycle Cost Analysis          Business Requirement                        Model Speci...
ΛTKINS                            Lifecycle Modelling      Operations                 Asset Financial Model               ...
ΛTKINS                     Risk & Financial Modelling          Treatment of Risk                Treatment of Options• Only...
ΛTKINS     Case III: M25 Scorecard and PaymechSafety• Improve road user safety• Improve road worker safetyOperations• Main...
ΛTKINS               Transfer: Role of the Private Partner                  Equity                                        ...
ΛTKINS                Transfer: Role of the Public Partner             Project Risk                                Guarant...
ΛTKINS                       When Transfer Breaks DownCited reasons for contract dispute:Source: Service Works Intl. (2011...
ΛTKINSISO31000 Risk Integration Framework     Communication and Consultation               Risk               AssessmentEs...
ΛTKINS                      Summary•   Clarify context of region/country•   Identify risks by type and source•   Allocate ...
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Risk Management Paper for Kuwaiti PPP Conference

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A description of a risk management method for analysing PPP-related risk in infrastructure projects, with three cases to illustrate its application.

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Risk Management Paper for Kuwaiti PPP Conference

  1. 1. Abu Dhabi Bahrain ΛTKINS Dubai Kuwait Oman Qatar Saudi Arabia India
  2. 2. ΛTKINS ΛTKINS Management Consultants Designing and Evaluating Risk Management Strategies for PPPDr Rupert Booth+973 399 81410Rupert.Booth@atkinsglobal.com
  3. 3. ΛTKINS Agenda• Overview: a Process not a Spreadsheet• Setting the Context• Risk Types and Identification• Risk Allocation and Potential Mitigation• Modelling across the Lifecycle• Risk Treatment & Transfer• ISO31000 Risk Framework• Summary
  4. 4. ΛTKINSRisk Management – a Process not a Spreadsheet • Identify motives for PPP • Perceptions become reality Survey CONTEXT • Identify types of risk IDENITFY • List risks by type Case I • Allocate risks to project stages ANALYSE • Examine source and potential mitigations Case II • Life-cycle modelling EVALUATE • Cost of capital & Real Options Case III • Public ↔ Private Transfer TREAT • Performance Management
  5. 5. ΛTKINS Setting the Risk Management Context Perceptions become Reality Multiple PPP Objectives• Perceived risk (including risk of • Risk transfer unknown) sets cost of capital • Process excellence e.g.• Valuations based on expected Kuwait • Transparency priorities cash flows • Private sector skills• Public (mis)perception becomes • Public debt ratios actual political risk • Boost to economy• Perceptions can affect deal structure, e.g. p-word FT 19Mar12
  6. 6. ΛTKINS Survey of Financiers Perceptions of Risks Top Risks for Equity Providers Top Risks for Senior Debt Providers (% state very important/important) (% state very important/important)Risk transfer to subcontractors, 97% Availability of interest rate swaps, 100%Return on subord.debt/quasi equity, 91% Risk transfer to subcontractors, 97%Target return on equity, 91% Availability of insurance, 91%Availability of insurance, 86% Interest margin on cost of debt 91%Inflation on opex, 77% Cover ratios, 91%Available insurance for construction, 74% Due diligence on financial model, 88%(9 risks cited in all) (13 risks cited in all)Source: SATER (2010), Public Private Partnership financiers’ perceptions of risk
  7. 7. ΛTKINS Survey of Financiers Perceptions of Risk Transfer Pre-Operational Phases Operational Phases (% state very important/important) (% state very important/important)Fitness for purpose of design, 100% Asset/service performance, 100%Delivery of design, 100% Asset/service reliability, 97%Planning problems, 98% Employment laws, 93%Construction cost over-run, 98% Security, 91%Planning approvals, 98% Change in public partner requirements, 91%Late delivery of design, 98% Costs of latent defects in assets, 85%(9 risks cited in all) (11 risks cited in all)Source: SATER (2010), Public Private Partnership financiers’ perceptions of risk
  8. 8. ΛTKINS Case I: Power Due Diligence, TurkeyPre-financial Close Operational Phase• Review of project agreements • Review of operating and Maintenance reports• Technology review • Annual report on O&M Contract• Risk assessments • Availability and Reliability• Input to Information Memorandum • Environmental performance• Review of technical input to financial model• Road show supportImplementation Phase• Regular site progress reporting• Payment validation• Advise on variations• Performance Test witnessing• Member of Acceptance Committee• Provisional Acceptance Certificate• Advise on Final Acceptance
  9. 9. ΛTKINS Identify Risks by Type Political Risks Commercial Risks Financial Risks Economic Risks•Expropriation •Completion: Cost, •Funding (timing) •Inflation•Change of law Time , Quality •Creditors •Interest rates•Judicial challenge •Availability •Currency •Exchange rates•Regulation •Demand: Price, convertibility •Devaluation(Environmental, Volume) •Currency transfer •TaxesEconomics) •Supply: •Redeposit risks •Technological•Reputation Availability, Cost change Develop Construct Operate Exit
  10. 10. ΛTKINS Sample Political Risks Phase Risk Source Mitigation/AllocationDevelopment Planning consent State Prior consent, or transfer to stateConstruction Residents’ opposition Community Stakeholder buildingOperation Tightening labour State Develop laws subcontracting networkExit Tighter State Due diligence on environmental future legislation legislation
  11. 11. ΛTKINS Sample Commercial Risks Phase Risk Source MitigationDevelopment Land acquisition Prior acquisition Stakeholder building Design faults EPC contractors ContractConstruction Cost over-runs EPC Contractors Contract Time over-runs EPC Contractors Contract Labour disputes Unions Terms & ConditionsOperation Asset performance EPC Contractors Contract Asset availability EPC Contractors Contract Low demand Target market New buyers Supply costs Suppliers New suppliersExit Asset damage Various Insurance Asset wear Usage Asset Management
  12. 12. ΛTKINS Sample Financial Risks Phase Risk Source Mitigation/AllocationDevelopment Open-ended, cash Project management Project monitoring drainConstruction Liquidity (for Project management Contingency funding overruns) arrangementsOperation Credit risk Creditors GuaranteeExit Currency transfer/ Change of law Contingency convertibility arrangements
  13. 13. ΛTKINS Sample Economic Risks Phase Risk Source Mitigation/AllocationDevelopment Key skill shortage Local labour Global recruitmentConstruction Commodity supply Global markets Forward contractsOperation Inflation Economic cycle Forward contracts Low/negative growth Economic cycle Offset with cost reductionExit Asset valuation Economic cycle Examine timing options
  14. 14. ΛTKINS Case II: Dublin Metro, Lifecycle Cost Analysis Business Requirement Model Specification• Shortfall in performance or quality • Analysis covered duration of the measures led to penalty payment. PPP contract• No ‘free’ railway possessions to the • Forecast maintenance, maintainer, so loss of service due to operational and renewal costs, planned possession or maintenance across specific asset groups works was treated unplanned loss• Need to model different • Included onerous hand back maintenance and renewal strategies requirements contract-end to choose optimal • Robust track model included so that the varying levels of usage over the contract life were modelled
  15. 15. ΛTKINS Lifecycle Modelling Operations Asset Financial Model Project Finance• Input Capex profile • Capital, fixed & • Equity• Relate to Volume working commitment & Revenue • Income & • Debt drawdown• Model Opex via Expenditure (to • Interest cost drivers and Earnings before • Tax unit costs Income & Tax) • Cash waterfall• Include staff and • Statements: • Ratios: key supplies o Income o Equity returns• Examine scenarios o Balance sheet & bottlenecks o Debt cover o Cash-flow Common assumptions: Inflation, exchange rates, tax rates etc
  16. 16. ΛTKINS Risk & Financial Modelling Treatment of Risk Treatment of Options• Only ‘Systemic Risk’ reflected in • Options occur when there is: discount rate o Uncertainty abut future• Project- and company-specific o Future information risk in cash flows: o Management ability to act o Diversifiable for international • Common uncertainties: investor o Market demand o Captures asymmetric effects o Environmental standards o Link to risk management • Options have a value, e.g.• Discount rate is Weighted Option to widen road if Average Cost of Capital for demand increases project company
  17. 17. ΛTKINS Case III: M25 Scorecard and PaymechSafety• Improve road user safety• Improve road worker safetyOperations• Maintain network• Improve incident management• User satisfaction• Journey improvement• Congestion reduction• Network AvailabilityManagement• Continuous Improvement• Management of AgreementExternal• Enhance the environment• Technology adoption
  18. 18. ΛTKINS Transfer: Role of the Private Partner Equity LoanSource: PWC (2008) The value of PFI; hanging in the balance (sheet)?
  19. 19. ΛTKINS Transfer: Role of the Public Partner Project Risk Guarantees Offered• Protect lenders from SPV • Loan/refinancing default • Revenue/usage• Demand/usage risk • Service charge to cover debt• Construction Risk • Change of law/regulation• Technology Risk • Debt assumption on termination• Sub-sovereign risk • Sub-sovereign creditworthiness• Policy risk• Macroeconomic• Residual valueSource: EPEC (2011), State Guarantees in PPPs
  20. 20. ΛTKINS When Transfer Breaks DownCited reasons for contract dispute:Source: Service Works Intl. (2011), The Importance of Transparency & Auditability in PPPs
  21. 21. ΛTKINSISO31000 Risk Integration Framework Communication and Consultation Risk AssessmentEstablishing Risk • Identificationthe Context Treatment • Analysis • Evaluation Monitoring and Review
  22. 22. ΛTKINS Summary• Clarify context of region/country• Identify risks by type and source• Allocate and mitigate• Risk analysis rooted in ongoing due diligence• Model scenarios, operationally and financially• Relate risk transfer/treatment to model findings• Base performance management on key parameters

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