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1. Introduction:
Among many themes related to public-private partnership (PPP) governance, risk
management is undoubtedly one of the core topics. The reason is that initial risk allocation
between parties in a PPP and subsequent management of risks that tend to emerge in the
course of project implementation are factors that determine costs of each partner. If cost
pattern is unpredictable and cost overruns become frequent and significant, this may have a
major detrimental influence on a project and may lead to a project failure. For example, a
private operator that has faced unanticipated risks and related large costs may simply
abandon the project, and all costs will be shifted to the government. On the contrary,
successful initial risk allocation, i.e., in the PPP contract, and effective risk management over
the project term may mitigate many kinds of risk, and keep each partner’s costs low. This
explains the significance of risk management; the latter is often viewed as a critical PPP
success factor. The assignment begins with highlighting the principal risks that partnerships
often face. Five major areas of risk in PPP are depicted in this section, and the distribution of
risk between public and private sector is identified. The essence of distribution of risk is
discussed and also the role of govt. or public authority to mitigate risk is delineated. This is
followed by the discussion of principles underpinning risk allocation in a PPP. Then
approaches to effective risk management are explained, and suggestions regarding how risks
can be mitigated are noted. In order to illuminate how a specific risk can be managed, a
separate section discusses revenue risk management using the examples from transitional
countries. An assignment intends to contribute to the body of knowledge about PPPs by
providing a structured and conceptualized delineation of risks and approaches to risk
management in partnerships, and by assessment of risk allocation and management aspects
from the perspective of their relevance to a transitional country.
Objective of the study: This assignment examines how risk is reflected in ppp
projects. Partnerships between public and private sectors in capital intensive network services
require risks to be assigned to the contractual party that is better able to mitigate them or to
bear them. After identifying risks that must be addressed in infrastructure contracts, their
classification, allocation, and impact are presented along with the measures to minimize risks.
We conclude that risk is a key issue in contracts with the private sector: an appropriate
allocation of risks is a necessary condition for successful contracts.

2. Methodology: We were given a set of topics for assignment. I chose the topic no. 9 which
is ‘’Definition of risk. Identify and explain the five major areas of risk in PPP. Discuss the
distribution of risk between the public and private sector and why it is crucial? Discuss what
role/ support the public authority/ Govt. can provide to PPPs to mitigate the risk? I collected
all data from secondary sources e.g. journals, websites, books, publications etc.
Definition of risk:
Risk is the chance that an investment’s actual return will be different from expected.
Risk is a possibility or threat of damage, injury, liability, loss or any other negative occurrence that is
caused by the external or internal vulnerabilities that may be avoided through pre-emptive action.
Risk is defined as the uncertainty of outcome, whether positive opportunity or negative threat, of
actions and events. Risks can apply to all levels of an organization or project. Corporate risk is
typically reflective of the aggregate of all potential negative events or opportunities across an entire
organization. Corporate risk is most commonly referred to as enterprise-wide risk. Project risk, on the
other hand is defined as the chance of an event happening which would cause the actual project
circumstances to differ from those assumed when forecasting project benefits and costs. Risk can be
practically defined as the product of the probability of an event occurring and the consequences if the
event does occur. Depending on the amount of information available, risk can be measured
qualitatively or quantitatively. A risk event specifically links the risk to the asset; for example, Force
Majeure risk could be identified and the risk event could be an earthquake causing the bridge supports
to collapse. To fully define a risk it is necessary to understand its two component elements: The
likelihood of a particular risk actually happening; and The impact or consequences if it happens. Risk
is inherent in every project, yet unlike most other procurement issues such as construction costs, bid
prices, and maintenance costs, risk has historically not been explicitly described or accounted for.
Risk is the chance of an event occurring which would cause actual project circumstances to differ
from those actually assumed when forecasting project benefits and costs. currency risk, inflation risk,
principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk,
income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk,
counterparty risk, purchasing-power risk, event risk.

3. Five major areas of Risk in PPP:
Partnerships are exposed to various kinds of risk. The purpose of this section is to explore
principal PPP risks and highlight how they are understood. This will allow to apply the
knowledge of risks to PPP practices in transitional countries such as Kazakhstan and Russia,
and investigate whether partnerships in these countries are exposed to the same kinds of risk
or not, and what the differences are. The next section discusses how risk is allocated between
partners.
1. Design and development Risks:
This risk relates to any defect in the design of the infrastructure facility or the design
requirements stipulated for the project. This is an inherent risk in the project as it is very
difficult to conclusively ascertain that damage to the facility is actually caused due to the
defect in the design parameters or the very design itself. Generally it is the design contractor
who is responsible for the design aspects of the project. In the event of the design parameters
being stipulated by the grantor of the concession or license, the risk would be within the
control of the grantor. Design deficiency is a critical risk with ranking of 5 in the meso risk
group. Frequently design changes disrupt the progress of the construction works, and may
lead to time and cost over runs. It is regarded as a moderate risk to PPP projects, and ranked
in 10th position among meso risk factors.
2. Construction Risks
The construction risks are essentially a bundle of various individual risk factors that
adversely affect the construction of a project within the time frame and costs projected and at
the standards specified for the facility. Construction risks are associated with PPP projects,
more traditional construction projects and the simpler forms of design/build projects. They
include:
• Land Expropriation. These risks may flow to both the government and concession
company. Available actions include claims under expropriation legislation or claims by the
concession company of liquidated damages from the contractor.

4. • Cost Overruns and Time and Quality: These risks affect the concession company directly.
The available actions are to either claim liquidated damages from the contractor or draw
down standby finance from the project lenders. (A major issue is that design requirements in
PPP projects are different than those for a traditional owner.)
• Cost and Scope of Identified but Unspecified Work and Variations: These risks flow
directly to the contractor and the concession company and represent a potential area of future
disputes.
• Increased Financing Costs. This risk flows directly to the concession company, which may
attempt to mitigate the risk either by a new injection of equity or subordinated debt from the
sponsors. Alternatively, the concession company may draw down standby finance from
project lenders.
• Contractor Default:. This is a risk to the concession company, which may claim liquidated
damages from the contractor or make a claim against the contractor’s performance bond and
bonding company.
• Default by Concession Company. This is the flip side of the prior risk. This risk is to the
contractor, with the primary mitigating measure being claim of liquidated damages from the
concession company.
• Environmental Damage. This risk accrues to the concession company primarily and may
result in claims on insurers or the party causing the damage.
• Force Majeure Event. This risk accrues to the concession company primarily and would
result typically in a claim to the project insurers.
3. Operating Risks:
Some of the risks that we may face in a PPP project apply also when we are providing
operations and maintenance (O&M) -type services. Except for termination of the concession
by the concession company, these risks flow directly to the concession company. Some of the
risks and actions available to the concession company include:
• Performance risk: The completed facility cannot be effectively operated or maintained to
produce the expected capacity, output or efficiency.

5. • Operation cost overrun: The operating costs exceed the original estimates
• Operating Contractor Default: The concession company may terminate the operations and
maintenance contract and appoint a new O&M contractor
• Force Majeure or Environmental Damage: In this type of event, the concession company
would most likely place a claim with its insurers because risks of this type would be normally
insurable.
• Default: The default may be caused by the actions of a third party, in which case the
concession company could make claims of damages against that party.
4. Financial Risks
Financial risks fall into these categories:
• Exchange rate risk relates to the possibility that changes in foreign exchange rates alter the
exchange value of cash flows from the project. Prices and user fees charged to local users or
customers will most likely be paid for in local currency, while the loan facilities and
sometimes also equipment or fuel costs may be denominated in foreign currency. This risk
may be considerable, since exchange rates are particularly unstable in many developing
countries or countries whose economies are in transition. In addition to exchange rate
fluctuations, the project company may face the risk that foreign exchange control or lowering
reserves of foreign exchange may limit the availability in the local market of foreign currency
needed by the project company to service its debt or repay the original investment.
• Interest rate risk. Force the project to bear additional financing costs. This risk may be
significant in infrastructure projects given the usually large sums borrowed and the long
duration of projects, with some loans extending over a period of several years. Loans are
often given at a fixed rate of interest (for example, fixed-rate bonds) to reduce the interest
rate risk. In addition, the finance package may include hedging facilities against interest rate
risks, for example, by way of interest rate swaps or interest rate caps.
5. Market and Revenue risks:
Revenue risk is the uncertainty in relation to the revenue that a project would actually
generate. The market and revenue risks that a PPP project may face can be grouped into the

6. three broad areas discussed below.
• Insufficient Income from Fares or Tolls. In the case of a PPP project operating under a
government concession, it would be expected that that the concession company would
request a cash compensation from the government for a deficiency in income from fares or
tolls, request authority to increase tolls or fares, or extend the concession period. Here it is
necessary to identify its risks clearly with respect to cash flow or its returns, as they may be
affected by an extended concession period.
• Insufficient Income from Other Operations. In this case, similar opportunities exist for
requesting the government to provide cash compensation for deficiencies and/or extending
the concession period. In addition, the concession company would have opportunities to
increase rents or pursue different business strategies, including alternate uses of major
portions of the concession facility.
• Insufficient Traffic. It is important for the PPP contractor to obtain a commitment from the
government, to the extent possible, with respect to anticipated traffic levels and to negotiate a
sufficient compensation arrangement for deficiencies. In the event that the government has
not offered to provide such additional compensation, needs review its role carefully as it
relates to traffic and earnings forecasts for a PPP project.
Distribution of risks between public and private sector:
Risks are allocated in a contract to the party best able to control them. In practice risks are
allocated to the private sector are paid by the govt. which pay for the facility over long term.
Risk allocation in partnerships has been discussed extensively in the scholarly literature and
various guidelines and documents for practitioners. This topic informs the broader discussion
of PPP governance and partner interaction from at least two perspectives.
The first one is that initial risk allocation is reflected in an original PPP contract, with an
attempt to avoid or reduce uncertainty regarding which party is assigned responsibility for
what, in case some event happens. It is argued that risks in PPP should be shared by the
public and private partners. As accepting an additional risk is likely to increase private
party’s costs and decrease its profits, the risk acceptance is subject to discussion during the

7. process of PPP contract negotiation and getting some compensation that is supposed to offset
increased costs. Effective negotiation of identified risks and related compensation in the
initial PPP contract becomes, from this perspective, a factor that contributes to a partnership
success. Risk sharing, much of which is specified in a partnership contract, is often viewed as
one of the main PPP aspects, especially in major infrastructure development projects due to
high capital costs.
The second perspective suggests that, notwithstanding the contracts, how exactly parties bear
the risk in the course of project implementation significantly depends on their interaction.
Some risks may not be spelled out in a contract, and may require further negotiation, while
some other provisions may be subject to interpretation by either party. Additionally, in the
long run, new circumstances of any kind may develop which will present new challenges and
possibly reallocation of responsibilities and costs. The examples of challenges to PPPs
include changes in legislative environment, political and economic reforms, and/or
international influences. Some of them cannot be foreseen, such as formation of (or phasing
out) a regional customs union, or a change in the region’s administrative boundaries (which
may influence the demand for a service). Especially in such cases, it is the dynamics of the
partners’ relationship, rather than initial risk allocation, that determines redistribution of risks
and related expenses.

8. Process of Risk Distribution:
Justifying the PPP option also depends on the ability to identify, analyse and allocate project
risks adequately. Failure to do so will have financial implications for the public sector and/or
the failure of the project to achieve its objectives. Thus, at the project identification stage, in
addition to assessing the sources of revenue linked with the affordability of the project, the
Authority and its advisers need to undertake a broad assessment of the risks that arise from
the project requirements in order to manage them. This can take the form of a risk matrix or a
risk register.
Risk management is an ongoing process which continues throughout the life of a PPP project.
It takes place in five stages:
• Risk identification: the process of identifying all the risks relevant to the project, whether
during its construction phase or its operational phase;
• Risk assessment: determining the likelihood of identified risks materialising and the
Magnitude of their consequences if they do materialise;
• Risk allocation: allocating responsibility for dealing with the consequences of each risk to
one of the parties to the PPP contract, or agreeing to deal with the risk through a specified
mechanism which may involve sharing the risk;
• Risk mitigation: attempting to reduce the likelihood of the risk occurring and the degree of
its consequences for the risk-taker; and
• Risk monitoring and review: monitoring and reviewing identified risks and managing new
risks as the PPP project develops and its environment changes. This process continues during
the life of the PPP contract.
Why Risk Distribution is crucial?
Some risk-taking is inevitable if an organization is to achieve its objectives. Those
organizations that are more risk aware appreciate that actively managing not only potential
problems (threats) but also potential opportunities provides them with a competitive
advantage. Taking and managing risk is the very essence of business survival and growth.

9. Effective risk allocation and management is likely to improve performance against objectives
by contributing to:
• To encourage the private sector to make partnership with public sector.
• Fewer sudden shocks and unwelcome surprises
• More efficient use of resources
• Reduced waste
• Reduced fraud
• Better service delivery
• Reduction in management time spent fire-fighting
• Better management of contingent and maintenance activities
• Lower cost of capital
• Improved innovation
• Increased likelihood of change initiatives being achieved
• More focus internally on doing the right things properly
• More focus externally to shape effective strategies.
• Essence of PPPs is analysis and allocation of project risks
• Essential for all parties to thoroughly review and address all the risks
• Many areas for potential conflict – reconciliation of various parties’ interests
The role/ support of public authority or govt. to mitigate risk in PPP:
If the govt. takes some initiatives to balance between public and private sector, it is possible
to mitigate risks in PPP. And the private sectors will get encouraged by those initiatives. It is
no mystery that the public sector has not adequately met the infrastructure needs in most
developing countries. The trend over the last twenty years has been towards increased private
sector involvement. In order for the public and private sector to successfully manage risks it
is necessary that developing country governments not regard private investors simply as a
source of financing to supplement diminishing public funds. This view has enabled a system
which lacks the appropriate legal and regulatory administration to appropriately address the

10. risks associated with PPPs. Therefore, in order to mitigate the risks that arise from public
private partnerships, the state must address several issues:
Public View: Protests by local communities and NGOs have created an impediment in this
process. It is crucial that investors as well as public authorities involve and educate all actors
involved before pursuing such a partnership. These needs must be addressed before a project
is implemented.
Award Process: The award processes, as well as the market research that exists prior often
create favouritism and lacks transparency. Decisions are not based on objective evaluation
criteria but rather on prior relationships and bureaucratic influence.
Regulatory Environment and Governance: Legislation in numerous developing countries
solely focuses on the public sector’s responsibility in providing infrastructure. It is not
designed to include private investors. Human capital to implement and explain this legislation
is also lacking and as a result, creating and enforcing contracts becomes a strenuous and
costly process.
Political Commitment by the State: The Jatrabari Flyover project was a success because
from the start, the government was committed to ensuring that the partnership was a success.
If rule of law is not firmly entrenched in governments, officials have been known to renege
on contracts signed by previous administrations.
Donor Assistance: Multilateral involvement in PPPs can reassure private investors that they
will have a support base if the government backs out or changes its policies. Donors can
assist with financing feasibility studies to ensure that sufficient preparations have been done
before launching projects. The Multilateral Investment Guarantee Agency (MIGA) covers
currency transfers, restrictions, and inconvertibility in the event of nonpayment on the part of
the government or as a result of a dispute. Donors can also assist with mitigating currency
risk. However, their involvement is not always a guarantee of project success.

11. Then the govt. should pay heed on the following issues with a view to mitigating risks in
PPP:
1. Governments need to address political risk:
Including the concern that governments will come in unilaterally and change the rules (the swing from
a positive approach to PPPs to a negative approach and cancellation of PPPs after an election is
commonplace in some countries).
2. Responding to private sector concerns over Government ‘red tape’
Government Red tapism is a great problem in managing public private partnership .Because red
tapism blockade the project to be efficient and effective. So the private sector must respond over
government red tape system.
3. Changing agreements, buts only in the right way
Governments can change the conditions of the agreement because of the long duration of projects.
Yet, it is important before the change is made, that the private partners are fully consulted. Similarly,
a government can ‘step in’ or terminate the contract if it perceives the projects to be going awry. Here
the private sector’s anxieties can be addressed by contractual clauses, which make termination and
‘step in’ measures last resort.
4. Providing necessary support and guarantees with care
Many projects, especially in transport, require massive private sector investment and here the private
sector may not accept one of the various commercial risks for these projects.
The public sector must provide support to a project and lower the risks sufficiently to stimulate the
desired levels of private sector investments.
5. However these types of guarantees and supports by governments must be provided with
care:
Governments take on liabilities which have important fiscal implications. There is a risk too that
inadvertently the governments create a guarantee culture where the private sector seeks guarantees as
an alternative to managing the risk themselves. Governments must stay focused on the fact that the
whole point of the ppp is to improve performance of the project, which is done by using the risk to its
investments as an incentive to the private sector well.
Because guarantees are valuable to beneficiaries and are provided at the discretion of government, this
can undermine governance.

12. 6. The risk and the benefits should both be shared.
After a ppp project such as prison, school, or hospital’s built, the level of risk falls substantially. This
is because with the facility built, the risk that the facility may not be completed on time disappears. As
a result, banks become receptive to review the interest rates it charges and to cut the cost of the
loan.This leads to the creation of financial surplus and raises the question of who should gain from the
success, bearing it mind that it has been typically the private sector that has taken on the construction
risk in the first stage of the project.
Current practice suggests that all parties, rather than one exclusively, should share in the gains and
that gains could be shared out by a formula agreed by the various parties before the agreement is
signed.
PPP afford both the public and private sector with a unique opportunity to share risk while providing
complementary support in order to ensure that the project leads to mutual benefits to both sectors.
Conclusion:
Risk is a key characteristic of public private partnerships. Risk assessment assists in overall project
evaluation, supports the design of technical requirements and commercial terms prior to procurement,
assists in negotiations with proposers with regard to the allocation of risk, and is a pre-requisite in
development of risk management plans. Under the conventional design-bid-build procurement
process, public agencies typically retain majority significant portion of the risks associated with a
project. When public agencies take on major projects under conventional procurement process they
tend to undervalue those retained risks. As a result, budget and schedule estimates are often optimistic
and the full life-cycle costs of a project are rarely considered. ppp derive much of their value by
structuring contract agreements to transfer many of the risks that are conventionally retained by the
public sector to the private sector. Despite potential problems and complexities, public-private
partnerships that are carefully planned and implemented can help governments to improve the quality,
reduce the price, and extend the coverage of services and they can accelerate the construction of
infrastructure and facilities that are crucial for economic development and social progress. PPPs and
other forms of public-private cooperation can be valuable instruments for leveraging the resources of
both the public and the private sectors and of enhancing the capabilities of national and local
governments to achieve their development goals In the course of project implementation one
partner often tries to shift risks to another partner. It is not unusual that parties cannot agree

13. on the proper risk allocation because when a party accepts a certain risk it also accepts related
costs that potentially may be very high and may turn project’s profit into a loss. This is one of
the main reasons why PPP projects fail. This note reiterates the importance of governance
and partner interaction in a PPP as opposed to intent to fully decide on risk allocation in an
original partnership contract. In other words, risk management includes not only initial risk
allocation specified in a contract, but also – and more importantly – additional allocation
and/or reallocation that may stem from unforeseen factors and that are likely to be heavily
influenced by how effective the partner interaction is. This presents a suggestion for future
research in transitional countries including Kazakhstan and Russia. As partnerships in these
nations are in the very beginning of their operations, the PPP research needs to embrace both
perspectives, i.e., firstly, to analyze how and why partners have shared risks initially, and,
secondly, investigate what kinds of decisions regarding additional risk reallocation are being
made, and what the contextual factors that drive these decisions are. On govt. part, the PPP
carter should keep up with its mandate to facilitate the PPP program, provide technical
assistance to national and local govt. agencies and to the private sector to help develop and
implement critical infrastructure and other development.

14. References
1. Wikipedia
2. Partnerships victoria, Risk allocation and contractual issues, June 2001
3. IMF, PPP and fiscal: International seminar on strengthening public investment and
managing risks from public-private-partnerships, Hungary 7-8 march 2007
4.http://ppp.worldbank.org/public-private-partnership/financing/risk-mitigation-mechanisms-
products
5. European commission ,Guidelines for successful public private partnerships.
6. NCHRP Report 658, Guidebook on Risk Analysis Tools and Management Practices to
Control Transportation Project Costs, 2010)
7. Gabriel Roth, The Private Provision of Public Services in Developing Countries, New
York:
Oxford University Press. 1987.
8.http://www.gmanetwork.com/news/story/332557/economy/business/private-sector-in-ppp-
initiative-needs-to-mitigate-risks-as-well
9. Dennis A. Rondinelli and Gyula Vastag, ‘Urban Economic Growth in the 21st Century,’ in
R.
Bilsborrow (ed.) Migration, Urbanization and Development, Norwell, MA: Kluwer, 1998):
469-
10. https://www.academia.edu/People/Risk_allocation_in_Public_Private_Partnerships