A comprehensive risk analysis is fundamental to identifying the value for money, if any, that may be available from delivering the project as a public private partnership. While the risk matrix provides a necessary checklist for the risks associated with a particular project, these risks must be quantified within the PSC to determine the potential value for money from a partnership arrangement.
Agencies should bear in mind that the purpose of the PSC is to identify and cost material risks. Although the preparation of the PSC requires the identification of all project risks, not all of these risks will be material. Materiality is a function of the value of the risk and its probability of occurrence. A commonsense approach is required, as in the majority of cases, only a small proportion of the total risks identified will have material consequences - the Pareto principle should be applied so that the PSC is not rendered meaningless through excessive complexity.
The identification of key risks in a project relies principally upon experience, judgement and, to a significant extent, creative and lateral thinking. The effective identification of risks is also dependent upon a disciplined approach that requires the completion of each stage in the risk analysis process before proceeding to the following stage. The failure to complete each essential stage in the process can lead to an incomplete and inaccurate analysis that can undermine the substance of the business case supporting the project.
The stages in the risk analysis process are:
■ identification of all material risks;
■ defining risks in the broad categories of retained, transferable and shared risks;
■ quantification and modelling of risk outcomes to value these risks; and
■ the allocation of risks that will eventually be incorporated in a draft PPP contract.