ppp-risk anthony smith

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Risk Management in PublicRisk Management in Public--

Private Partnerships, Value forPrivate Partnerships, Value forMoney and the Public SectorMoney and the Public Sector

ComparatorComparator

Anthony SmithAnthony Smith

Farne Project ConsultancyFarne Project Consultancy

Seoul October

2007


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Risk Management in PPPRisk Management in PPPss

What is risk?:What is risk?:

Oxford English Dictionary defines risk asOxford English Dictionary defines risk as aachance or possibility of danger, loss, injurychance or possibility of danger, loss, injuryetc.etc.

Other definitions:Other definitions: Lack of predictability about structure, outcome orLack of predictability about structure, outcome or

consequences in decision or planning situationsconsequences in decision or planning situations

the chance of something happening that will havethe chance of something happening that will havean impact on objectivesan impact on objectives


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Risk Management in PPPRisk Management in PPPss

Risk can be characterized by 3 factors:Risk can be characterized by 3 factors: The Event: the possible occurrence which wouldThe Event: the possible occurrence which would

affect the achievementaffect the achievement

The Likelihood of the event happeningThe Likelihood of the event happening

The impact of the event occurring (financial, socialThe impact of the event occurring (financial, social

etc.)etc.)


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Methods of risk managementMethods of risk management

Identify the riskIdentify the risk

Assess the risk: qualitative andAssess the risk: qualitative and quantitivequantitive Respond to the risk:Respond to the risk:

AvoidanceAvoidance

PreventionPrevention

Transfer:Transfer:

basic principle: the risk should be borne by the party bestbasic principle: the risk should be borne by the party best

able to manage it.able to manage it.

RetentionRetention

ReductionReduction


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Risk in stages of PPPRisk in stages of PPP

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

Start Up PhaseStart Up Phase Construction and completion risks are over but commissioningConstruction and completion risks are over but commissioning

and settling down to provision of the services means that the riand settling down to provision of the services means that the risksk

here is higher than during the rest of the operations phase e.g.here is higher than during the rest of the operations phase e.g.

testing, marketing and staffingtesting, marketing and staffing

Operations PhaseOperations Phase

The period of the project with the least risksThe period of the project with the least risks


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Risk Management associated withRisk Management associated with

Infrastructure PPPInfrastructure PPPss Land acquisition riskLand acquisition risk

Planning risk: cost of obtaining, risk of delayPlanning risk: cost of obtaining, risk of delayor rejection or unsatisfactory conditionsor rejection or unsatisfactory conditions

imposed;imposed;

Design risk: changes in design by SPV/Design risk: changes in design by SPV/

Authority;Authority;

Construction Risk: incorrect time estimates,Construction Risk: incorrect time estimates,unforeseen ground conditions, failure tounforeseen ground conditions, failure to

obtain services, protestor action;obtain services, protestor action;


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Risk management associated withRisk management associated with

Infrastructure PPPInfrastructure PPPss Operational Risks:Operational Risks:

Demand Risk:Demand Risk: Transport/tourism/Transport/tourism/defencedefence

Government service infrastructure (education/health etc.)Government service infrastructure (education/health etc.)

fitness for purposefitness for purpose of plant and equipmentof plant and equipment Latent defects in new build/existing buildingsLatent defects in new build/existing buildings

Changes in specification by AuthorityChanges in specification by Authority

Performance of subPerformance of sub--contractorscontractors Relief eventsRelief events

ForceForce MajeureMajeure eventsevents

TerminationTermination


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Infrastructure PPPInfrastructure PPPss Operational Risks (continued):Operational Risks (continued):

Obtaining/maintainingObtaining/maintaining licenceslicences and consents.and consents. Sub standard plant operationSub standard plant operation

Lifecycle maintenance costsLifecycle maintenance costs

Changes in lawChanges in law

Non performance of the servicesNon performance of the services

Third Party Income levelsThird Party Income levels Authority default: compensation/terminationAuthority default: compensation/termination


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Infrastructure PPPInfrastructure PPPss Residual Value Risks:Residual Value Risks:

DecontaminationDecontamination Will Authority require the asset at the end of theWill Authority require the asset at the end of the

contract term?contract term?

Disposal of surplus operational plant andDisposal of surplus operational plant andequipmentequipment

Financial Risks:Financial Risks:

InflationInflation

Insurance premium risesInsurance premium rises

Interest rates before/after financial closeInterest rates before/after financial close


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Infrastructure PPPInfrastructure PPPss Performance risks:Performance risks:

Failure to meet performance standardsFailure to meet performance standards Availability of facilitiesAvailability of facilities

Technology /obsolescence riskTechnology /obsolescence risk


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Value for MoneyValue for Money

DefinitionDefinition:: The optimum combination of whole lifeThe optimum combination of whole lifecosts and qualitycosts and quality..

This doesThis does notnot mean the cheapest!mean the cheapest!


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VfMVfM best achieved by:best achieved by: Reducing cost and time of procurementReducing cost and time of procurement

Improving project, contract and asset managementImproving project, contract and asset management

Competition: using competitive procurement:Competition: using competitive procurement:1.1. Assessing the need for goods and servicesAssessing the need for goods and services2.2. Producing specification of requirementsProducing specification of requirements

3.3. Agreeing potential list of suppliersAgreeing potential list of suppliers

4.4. Issuing invitation to tenderIssuing invitation to tender

5.5. Evaluating and refining bids receivedEvaluating and refining bids received6.6. Identifying preferred bidderIdentifying preferred bidder

7.7. Agreeing form of contractAgreeing form of contract

8.8. Appointing providerAppointing provider

9.9. Evaluating performance of contractEvaluating performance of contract

10.10. Providing feedback for future contractsProviding feedback for future contracts


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Make use of size of government purchasing powerMake use of size of government purchasing power:: Use of strategic alliances/ central procurement agenciesUse of strategic alliances/ central procurement agencies

Use of framework agreementsUse of framework agreements

Use of continuous improvementUse of continuous improvement:: On a project specific basis (e.g. ratcheting performanceOn a project specific basis (e.g. ratcheting performance

mechanism/ benchmarking/ market testingmechanism/ benchmarking/ market testing

By using the feedback procedure for future projects andBy using the feedback procedure for future projects andspreading best practice to other departmentsspreading best practice to other departments

Using best procurement processUsing best procurement process:: Public sector comparatorPublic sector comparator


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VfMVfM: the Public Sector Comparator: the Public Sector Comparator

Public Sector Comparator (Public Sector Comparator (

PSCPSC

) is a comparison of) is a comparison of

the hypothetical cost to government of a projectthe hypothetical cost to government of a projectimplemented by the Public Sector and the cost ofimplemented by the Public Sector and the cost ofproviding the same using the Private Sector.providing the same using the Private Sector.

Purpose of the PSC:Purpose of the PSC: to ensure that the method of procurement gives the best valueto ensure that the method of procurement gives the best value

for money for a projectfor money for a project

To promote full cost pricing at an early stage in the projectTo promote full cost pricing at an early stage in the project

To assist in the management of the procurement processTo assist in the management of the procurement process

To provide a reliable means of demonstratingTo provide a reliable means of demonstrating VfMVfM

To provide a consistent benchmarking and evaluation toolTo provide a consistent benchmarking and evaluation tool

To encourage bidding competitionTo encourage bidding competition


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PSC = Transferable risk + Competitive neutrality + RawPSC = Transferable risk + Competitive neutrality + RawPSC + Retained RiskPSC + Retained Risk

Where:Where: Transferable risk = the value of the risk transferred to the bidTransferable risk = the value of the risk transferred to the bidderder

Competitive neutrality= the value of the net competitiveCompetitive neutrality= the value of the net competitiveadvantage that a government business has due to its publicadvantage that a government business has due to its publicownershipownership

Raw PSC = the total of all capital and operating costs (bothRaw PSC = the total of all capital and operating costs (both

direct and indirect) that would be incurred if the public sectodirect and indirect) that would be incurred if the public sectorrwere to carry out the projectwere to carry out the project

Retained Risk = the value of any risk that is not to be transferRetained Risk = the value of any risk that is not to be transferredredto the bidderto the bidder


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In order to construct the PSC, a PSC Reference ProjectIn order to construct the PSC, a PSC Reference Projectis identified. This is the most likely and efficient form ofis identified. This is the most likely and efficient form ofpublic sector delivery of the project that would satisfy allpublic sector delivery of the project that would satisfy allelements of the output specification.elements of the output specification.

The reference project should:The reference project should: Reflect the most likely (and achievable) form of procurementReflect the most likely (and achievable) form of procurement

approachapproach

Provide the same level and quality of service as is expected ofProvide the same level and quality of service as is expected of

the bidder to enable a like for like comparisonthe bidder to enable a like for like comparison Be framed to be a conforming bid as if it were part of the biddiBe framed to be a conforming bid as if it were part of the biddingng

processprocess


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ThanksThanks

Anthony SmithAnthony Smith

FarneFarne Project ConsultancyProject ConsultancyPPP/PFI Project ConsultantsPPP/PFI Project Consultants

[email protected]@googlemail.comTel: 0044 1234 708930Tel: 0044 1234 708930

Mob: 0044 794 088 5730Mob: 0044 794 088 5730
mailto:[email protected]:[email protected]:[email protected]

ppp-risk anthony smith

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