Identifying and understanding the different kinds of project risks and their financial impact are only the first steps in risk allocation. The next, and perhaps more crucial step, is deciding who would bear the risks. Projects which belong to the same sector oftentimes require the same allocation of risks between parties, due to similar sectoral characteristics. Waterworks projects implemented under PPPs for instance will generally be exposed to completion risks, as they require infrastructure facilities. Private investors generally prefer a well-established path: proponents would apply the risk allocation implemented in previous transactions, to prospective projects so as to facilitate packaging and financing.
The risk-sharing templates as presented in Table 2-8 follow these cardinal rules
• Specific risks are normally allocated to the party that is best able to manage controllable risks; or best able to insure uncontrollable but insurable risks; or best able to bear the financial consequences of uncontrollable and uninsurable risks
• PPP in the Philippines' infrastructure program, as a general rule, should focus on financially viable projects that can provide a service at an affordable tariff, i.e., projects that do not require government investment subsidies, operating subsidies, and, to the extent possible, other contingent liabilities
The illustrative examples are based on the following assumptions:
• A minimum of government support is the primary (but not exclusive) consideration.
• Each risk template identifies the typical risks the LGU bears, although risk-sharing has to be done in a manner not to discourage investors.
• Only seven risk templates are provided:
- Site or right of way (ROW) acquisition
- Completion
- Operations
- Market or commercial risk
- Political force majeure
- Environmental/ disaster risks
- Government performance
● Risk templates represent a dynamic process: what may apply in a certain year may not necessarily work three years hence, as local and international macroeconomic factors affect how proponents and banks assess the bankability of projects.
Table 2-8: Risk-Sharing Template for Sector Projects
Responsible Entity | ||||||||
Market | Government Center | Water Supply | Solid Waste management | |||||
Private | Public | Private | Public | Private | Public | Private | Public | |
Site |
| / |
| / | / |
|
| / |
Completion | / |
| / |
| / |
| / |
|
Operation | / |
| / |
| / |
| / |
|
Market | / |
| / |
| / |
|
| / |
Political |
| / |
| / |
| / |
| / |
Environment | / |
| / |
| / |
| / |
|
LGU Performance |
| / |
| / |
| / |
| / |
To illustrate this risk-sharing concept, three examples of PPP projects covered in volume 3 of this manual, namely, public market and commercial center, government administrative center, and water supply, are discussed below.