risk management in ppp projects
TRANSCRIPT
-
8/23/2019 Risk Management in Ppp Projects
1/28
1J
Risk Management in PPP ProjectsMormugao, 21st September, 2007
-
8/23/2019 Risk Management in Ppp Projects
2/28
2J
Agenda Overview of Risks in PPP Contracts
Types of risk
Mitigation strategies
Case Studies
Mumbai Pune Express way
Mundra Port
Mumbai Metro
Conclusions
-
8/23/2019 Risk Management in Ppp Projects
3/28
3J
Sources of RiskGovernment
Target Market
Devel
opers
Risks in a typical
PPP project
Demand
Legal & Regulatory
Framework
Contracts
Construction
O & M
-
8/23/2019 Risk Management in Ppp Projects
4/28
4J
Risks in PPP ProjectsPolitical
Force Majeure
Risk
Market Risk
Regulatory
Operational &
Maintenance
Financial Risk
Cost OverrunRisk
Land Acquisition
Risk
Commercial
Technology Risk Construction
Risk
RISKS
RISKS
-
8/23/2019 Risk Management in Ppp Projects
5/28
5J
Risk Categories, Phase of Dominance and Allocation
- Social risk
- Nationalization or revocation
- Events of warsInstitution/Private partyThroughout Project Cycle
Political & social risk
Institution/Private partyConstruction/Operations PeriodEnvironmental risk
Institution/Private partyThroughout Project CycleForce Majeure
Private partyThroughout Project CycleInsolvency and outside creditor risk
Private partyOperations PeriodTermination risk
- Inflation risk
- Tax rate change risk
- Foreign exchange exposure risk
- Interest rate riskPrivate partyOperations Period
Financial risk
Private partyOperations PeriodOperations & maintenance risk
Private partyOperations PeriodCommercial risk
Institution/Private partyOperations PeriodRegulatory & administrative risk
Private partyConstruction/Operations PeriodTechnology riskPrivate partyConstruction PeriodProject cost risk/Cost over-runs
Private partyConstruction PeriodProject completion risk
- Planning risk
- Design risk Private partyProject Development
Delays in project developmentInstitution/Private partyProject DevelopmentLand acquisition
Allocation of riskPhase of dominanceRisk Categories
-
8/23/2019 Risk Management in Ppp Projects
6/28
6J
Risk Mitigation StepsDetermineSeverity of
Risk
AllocateRisk
Mitigate theRisk
IdentifyRisk
Price theRisk
Identifying
the eventsor Actions
which
Effects the
Viability of
the Project
In Case the
Event occurthe effect of
the same on
the cost /
time of the
project
Identifying
and
allocatingthe risk to
the party
who can
manage it
best
Steps /
actionswhich can
be taking to
reduce the
chances of
the eventoccurring
Cost ofaddressing
the risk have
to be
determined
-
8/23/2019 Risk Management in Ppp Projects
7/28
7J
Management of Risks What ?
Time and Cost Overruns or shortfall in performance parameter of
the competed project
Why? High capital intensity and a relatively long construction period
How to Mitigate? Engineering, procurement, and construction contracts to an
experienced and reputed firm
Provisions for liquidated damages in the contract(s)
Construction Risk
-
8/23/2019 Risk Management in Ppp Projects
8/28
8J
Management of Risks What ?
Technical performance of the project during its operational phase
can fall below the levels projected by investors
Why? Technology is untried or is changing rapidly or inability of the
operator to manage such big and complex project i.e. Metro
How to Mitigate?
Entrusting operation to experienced operations and maintenance
contractors
Provisions for liquidated damages in the contact(s)
Insurance against Force Majeure risks
Operations Risk
-
8/23/2019 Risk Management in Ppp Projects
9/28
9J
Management of Risks What ?
Possibility that market conditions assumed in determining the
viability of the project are not realized. Non fulfillment of demand
projections is an obvious example
Why?
Uncertainty in the forecast of the demand projections
How to Mitigate?
Investors enter into a contract with the monopoly purchaser to
guarantee a minimum level of purchase.
Market/Demand Risk
-
8/23/2019 Risk Management in Ppp Projects
10/28
10J
Management of Risks What ?
Interest rates can vary during the life of the project (construction
and payback period)
Why? High capital intensity (large impact) and long payback periods
(Risk spread over a long time). Interest cost is a large component of
the total project cost
How to Mitigate?
Pass it on to consumers, as, for example, in arrangements in which
the impact of interest rate variations on unit costs are treated as apass-through into the tariff
Using hedging instruments
Interest Rate Risk
-
8/23/2019 Risk Management in Ppp Projects
11/28
11J
Management of Risks What ?
Risk of not being paid for services delivered
Why?
Financial condition of public sector utilities in developing countries
is often very weak. These utilities are often the monopoly / large
buyer for example power and water
How to Mitigate?
Long term solution is to improve the financial condition of the
utilities by improvement in efficiencies or privatization
Short term, guarantee and counter guarantee by state and centralgovernment
Set up an escrow arrangement
Payment Risk
-
8/23/2019 Risk Management in Ppp Projects
12/28
12J
Management of Risks What ?
Any disruption in construction or operation of a project due to
regulatory changes
Why? Infrastructure projects have to interface with various regulatory
authorities throughout the life of the project, making them
especially vulnerable to regulatory action
How to Mitigate?
By establishing strong and independent regulatory authorities that
operate with maximum transparency of procedures within a legalframework that provides investors with credible recourse against
arbitrary action
Regulatory Risk
-
8/23/2019 Risk Management in Ppp Projects
13/28
13J
Management of Risks What ?
Any disruption in construction or operation of a project due to
political decisions
Why? Infrastructure projects have high visibility, and there is always a
strong ele-ment of public interest. This makes them vul-nerable to
political action that can interrupt or upset settled commercial
terms; in extreme cases it can even lead to cancellation of licenses
or nationalization.
How to Mitigate? Partially mitigated through political risk insurance offered by
multilateral organizations, such as the Multilateral Investment
Guarantee Agency, or bilateral investment protection agreements.
Political Risk
-
8/23/2019 Risk Management in Ppp Projects
14/28
14J
Typical Risk Allocation in India
NoNoNoNoNoYesSub-
ContractorEPC Contractor
YesNoNoNoNoNoAwarding
AgencyGovernment
NoYesNoNoNoNoLenderLenders
YesYesYesYesYesNoPromoterEquity Holders,
Developer
RegulatoryRisk
Interest
RateRiskMarketRiskRevenueRiskOperationRiskConstructionRiskRoleRiskParticipants
Developer carries all type of risk in India unlike UK and
other Latin American Countries where governmentguarantee minimum revenue and share the same also in
case that exceeds threshold limit
-
8/23/2019 Risk Management in Ppp Projects
15/28
15J
Management of Risks
HighHighProjectSpecific
LowLowMediumPower
MediumLowProject
Specific
HighHighHighAirport
LowLowProjectSpecificMediumMediumHighPort
MediumMediumProject
Specific
Project
Specific
LowHighRoad
Regulatory
Risk
Payment
Risk
Interest
Rate Risk
Market
Risk
Operation
Risk
Construction
Risk
Type of
Project
Market Risk versus Payment Risk
-
8/23/2019 Risk Management in Ppp Projects
16/28
16J
Agenda Overview of Risks in PPP Contracts
Types of risk
Mitigation strategies
Case Studies
Mumbai Pune Express way
Mundra Port
Mumbai Metro
Conclusions
-
8/23/2019 Risk Management in Ppp Projects
17/28
17J
Mumbai Pune Expressway Total Project Cost
Rs 2136 crores
Initial estimate
Rs 1600 crores
Time taken
3 years
Physical land acquired
1030 ha
Contractors appointed:
IJM / SCL Joint Venture
Hindustan Construction Co. Mumbai
Larsen and Toubro Ltd. Mumbai
V.M. Jog Engineering Ltd. Pune
Konkan Railway Corporation Ltd
Operation & Maintenance:
Ideal Road Builders (IRB)
-
8/23/2019 Risk Management in Ppp Projects
18/28
18J
Mumbai Pune Expressway
Risks borne by MSRDC
Land acquisition
Specific project clearances Political
Non-insurable Force Majeure
Water & Power Availability at
source Project completion
Risks borne by Private party
Design
Construction Operation & Maintenance
Project cost
Financing
Revenue
Technology
Insurable Force Majeure
Risk Allocation
-
8/23/2019 Risk Management in Ppp Projects
19/28
19J
Mumbai Pune ExpresswayRisk mitigation by MSRDC
Different consultants appointed for
the purpose of detailed engineering
and for construction supervision ofworks
Land acquisition and clearances for
tree felling, forest clearing etc.
obtained beforehand
Environmental impact assessment
carried out by external agencies
Strong political will
Providing power through 8 MSEB
substations Removing/diverting utility service
lines (power, telephone, water &
sewer) coming in alignment
Risk mitigation by Private party
Pre-approved designs for the
respective road segments Financial SOPs from GoM (Tax,
imports etc.)
Contractual and legal shield
Employing state-of-the-art
technology for carrying out theconstruction work
Subcontractors working under tight
clauses
Absorption of certain costescalations by MSRDC
-
8/23/2019 Risk Management in Ppp Projects
20/28
20J
Mumbai Pune Expressway Total Project cost
Rs 2151 crores
Multi-terminal greenfield portdeveloped through PPP by the state of
Gujarat
Commenced operations in 1999
Traffic is at 8 MMTA
Was one of the first ports to securerail connectivity by putting up the
investment for it through PPP (Rs 136crores)
Private party
Gujarat Adani Port Ltd. (GAPL) and P&O
-
8/23/2019 Risk Management in Ppp Projects
21/28
21J
Mumbai Pune Expressway
Risks borne by GoG/GMB
Revenue
Regulatory & administrative Political & social
Creditor
Environmental
Risks borne by Private party
Design & Construction
Operation & Maintenance Subcontractor
Financing
Revenue
Financial
Technology
Environmental
Connectivity Rail, Road
Risk Allocation
-
8/23/2019 Risk Management in Ppp Projects
22/28
22J
Mumbai Pune ExpresswayRisk mitigation by GoG/GMB
Traffic risk sharing
Required clearances obtained
beforehand
Transparent and clear-cut
BOOT policy in place
Sustained political support to the
non-major port development
cause
Various bodies constituted for
reviewing and monitoring the
PPP process
Risk mitigation by Private party
30 years Concession agreement
with GMB Future development rights and
sub-concession contracts
Tariff set by P&O (independent
of TAMP) Developed own rail connectivity
Heavy machinery & equipments
taken on lease basis
GAPL sold stake to P&O ports
-
8/23/2019 Risk Management in Ppp Projects
23/28
23J
Mumbai Metro Total Project cost
Rs 2356 crores
First phase
2006-11
Commencement of Operations
2009-10
Mass transit corridor from Andheri to
Ghatkopar
First MRTS project in India beingimplemented on Public PrivatePartnership (PPP) format
DMRC (Delhi Metro Rail Corporation)prepared the master plan for Mumbaimetro
Private party
Reliance Energy Ltd
-
8/23/2019 Risk Management in Ppp Projects
24/28
24J
Mumbai Metro
Risks borne by MMRDA
Land acquisition
Force Majeure Environmental
Political & social
Risks borne by Private party
Design & Construction
Operation & Maintenance Subcontractor
Financing
Revenue
Financial
Technology
Project completion
Environmental
Risk Allocation
-
8/23/2019 Risk Management in Ppp Projects
25/28
25J
Mumbai MetroRisk mitigation by MMRDA
Detailed feasibility study carried
out by TEWET in associationwith DE-Consult & TCS, during
1997-2000
Plan updated by MMRDA in
2004
Clearances obtained
beforehand
Deep political backing by GoM
Risk mitigation by Private party
35 years Concession agreement
with MMRDA Contractual & legal shield
Capital contribution of Rs 650
crores with a 70:30 debt-equity
ratio Independent parties assigned
the review and monitoring job
Technical consultants appointed
for planning & reviewing theengineering & construction
phase
Insurance coverage for certain
Force Majeure
-
8/23/2019 Risk Management in Ppp Projects
26/28
26J
Agenda Overview of Risks in PPP Contracts
Types of risk
Mitigation strategies
Case Studies
Mumbai Pune Express way
Mundra Port
Mumbai Metro
Conclusions
-
8/23/2019 Risk Management in Ppp Projects
27/28
27J
Conclusions PPP Projects are complex projects that require effective
attention to risk and their mitigation
Risks are inherently related to returns and theservice/expertise which yields those returns
This gives a good perspective on who is best placed to bear the risk
Objectives of the government in taking up a ppp project is essential todecide who bears a particular risk
PPPs in Western India
Very active as compared to other parts of the country and ever increasingactivity
Activity is mainly confined to transportation sector
However some landmark projects have failed because risks were notproperly identified
Some General Principles in Risk Management
Thoroughness in identification of risks
Lessons from similar projects
Should be borne by party best placed to bear it
Quantification of financial impact to the extent possible
Thoroughness of documentation
-
8/23/2019 Risk Management in Ppp Projects
28/28
28J
Thank You!