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ΛTKINS ΛTKINS Management Consultants Designing and Evaluating Risk Management Strategies for PPPDr Rupert Booth+973 399 81410Rupert.Booth@atkinsglobal.com
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
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
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
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
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
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
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
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
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
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
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
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
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
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
ΛTKINS Transfer: Role of the Private Partner Equity LoanSource: PWC (2008) The value of PFI; hanging in the balance (sheet)?
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
ΛTKINS When Transfer Breaks DownCited reasons for contract dispute:Source: Service Works Intl. (2011), The Importance of Transparency & Auditability in PPPs
ΛTKINSISO31000 Risk Integration Framework Communication and Consultation Risk AssessmentEstablishing Risk • Identificationthe Context Treatment • Analysis • Evaluation Monitoring and Review
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