The first step toward structuring the PPP is often to put together a comprehensive list of all the risks associated with the project. Such a list is known as a 'risk register'. In this context, a 'risk' is unpredictable variation in the project's value-from the point of view of some or all stakeholders-arising from a given underlying 'risk factor''. For example, 'demand risk' is the risk that the project value, and project revenues, will be lower (or higher) than expected because demand is lower (or higher) than expected. Irwin's book on PPP guarantees and risk defines risk in more detail [#161].
PPP risks vary depending on the country where the project is implemented, the nature of the project, and the assets and services involved. Nonetheless, certain risks are common to many types of PPP project. These are usually grouped into risk categories, which are often risks associated with a particular function (such as construction, operations, or financing), or with a particular project phase (such as termination). Box 3.7: PPP Risk Categories.
Box 3.7: PPP Risk Categories The following categories of risk are common to many PPPs: • Site-risks associated with the availability and quality of the project site, such as the cost and timing of acquiring the site, needed permits or assuring rights of way for a road, the effect of geological or other site conditions, and the cost of meeting environmental standards • Design, construction and commissioning-risk that construction takes longer or costs more than expected, or that the design or construction quality means the asset is not adequate to meet project requirements • Operation-risks to successful operations, including the risk of interruption in service or asset availability, the risk that any network interface does not work as expected, or that the cost of operating and maintaining the asset is different than was expected Demand, and other commercial risk-the risk that usage of the service is different than was expected, or that revenues are not collected as expected • Regulatory or political-risk of regulatory or political decisions or changes in the sector regulatory framework that adversely affect the project. For example, this could include failure to renew approvals appropriately, unjustifiably harsh regulatory decisions, or in the extreme, breach of contract or expropriation • Change in legal framework-the risk that a change in general law or regulation adversely affects the project, such as changes in general corporate taxation, or in rules governing currency convertibility, or repatriation of profits • Default-the risk that the private party to the PPP contract turns out not to be financially or technically capable to implement the project • Economic or financial-risk that changes in interest rates, exchange rates or inflation adversely affect the project outcomes • Force Majeure-uninsurable risk that external events beyond the control of the parties to the contract, such as natural disasters, war or civil disturbance, affect the project • Asset ownership-risks associated with ownership of the assets, including the risk that the technology becomes obsolete or that the value of the assets at the end of the contract is different than was expected. For more detail, see Yescombe's chapter on risk evaluation and transfer [#295], and Delmon's chapter on risk allocation [#58, Chapter 5], both of which start with descriptions of typical types of PPP risk. |
Many resources provide 'standard' risk lists and preferred risk allocations, in some cases for specific project types. Several examples are provided in Section 3.3.2: Allocating Risks. These standard lists can be useful resources when identifying project risks for a particular PPP. However, PPP projects often have unique features or circumstances-for example, the particular geological conditions on the route of a proposed road. This means that implementing agencies should make use of experienced advisors to help identify a comprehensive list of project risks.