Once the identified risks have been quantified using the above process, their value (i.e., the likely cost of these risks should they occur) needs to be added to the quantitative analysis in order to compare procurement models on a risk-adjusted basis.
The Shadow Bid model is therefore adjusted to include the cost of bearing transferred risks in its costs of financing, as well as in its contingencies relating to both construction and operating budgets.
Since the purpose of the PSC model is to estimate the cost of a project to the owner if it were procured traditionally, with no transfer of risks assumed to be allocated to the private sector under a PPP, the expected value of these retained risks must be added to the cost of the PSC.
The incorporation of risk into the PSC can be accomplished in two ways:
1. Calculating the aggregated expected value of risk during construction and operational phases, then discounting them to a NPC to be added to the overall project NPC; or
2. Adjusting the annual cash flows in both the construction and operating periods to appropriately account for the risks, thereby making the project cash flows risk-adjusted. When the risk-adjusted cash flows are discounted to calculate the NPC of the project, the resulting NPC will also be risk-adjusted. Using this approach, project cash flows can also be adjusted to incorporate risks that will likely occur once or twice during the concession, as well as annual risk costs.
An important consideration in the allocation and corresponding quantification of risk is that the potential financial impact of a risk event is determined from the perspective of the party retaining the risk. A risk that is transferred to a private partner determined to be better able to avoid or mitigate that particular risk, would have a lower value under the Shadow Bid than the same risk under the PSC.
For example, in the absence of the discipline imposed by at-risk equity finance under a PPP, costs associated with the potential for construction delay risk might be considered more likely (higher) under traditional procurement where the incentives to achieve the construction schedule are less significant.