A crucial element in ensuring good performance and sustained service delivery under a PPP contract is monitoring and managing the risks and responsibilities allocated to government. A central tool often used by implementing agencies in doing so is a 'risk management plan'.
A risk management plan typically lists each risk and associated responsibilities borne or shared by the government, as well as those that may undermine sustainability of the PPP (and so lead to risk of default, or poor performance). For each risk, the plan should also identify the information needed to monitor the risk, and possible actions to mitigate the risk or its impact. These information requirements should also be part of the reporting requirements defined in the contract. Farquharson et al [#95, pages 153-158] provides a sample extract of a risk management plan for a PPP, which lists risks, and for each risk describes the 'owner', status, estimated impact, comments, mitigating actions, target dates for action, and current risk status.
The risk management plan should be developed by the contract manager prior to the start of the contract, then act as a resource and guide throughout the duration of the contract. The contract manager typically collects the relevant risk monitoring information from the private party, and relevant external information (such as on economic trends), to regularly update the plan. The contract manager then needs to:
• Monitor indicators against expected levels, to identify emerging risks. For example, traffic levels failing to climb as projected may indicate a risk that a minimum traffic payment will be triggered
• Take the planned mitigating actions, where there are risks that the implementing agency can control (or ensuring private party is doing the same). For example, if government is responsible for associated infrastructure that is falling behind schedule, the plan may be to transfer responsibility for that infrastructure to a higher level team in government, or to the private party
• Even where risks cannot be controlled, consider possible actions and responses. For instance, if floods threaten critical water service facilities, government may start work with the private party on an emergency response, including alternative supplies, rationing, and a service re-instatement plan.
Box 3.15: Example of Weak Risk Monitoring-Victoria Trams and Trains provides an example of weak risk management, where the government's contract monitor collected risk information, but failed to act on it.
Box 3.15: Example of Weak Risk Monitoring-Victoria Trams and Trains The trams and trains franchises in Melbourne, Australia provide an example of the implications of inadequate risk monitoring. The government awarded a series of franchises for the city's urban transport system, in which demand risk was largely borne by the private parties. Demand turned out to be substantially lower than expected, resulting in financial difficulties for the companies. The government's contract monitor was receiving information from the private parties, which showed the deteriorating financial performance. However, the monitor failed to hear the alarm bells or take any remedial action. Performance continued to deteriorate, to the point that the private parties' best option was to walk away from the contract, and the government had no option but to renegotiate. Source: Erhardt, D. & Irwin, T. (2004) Avoiding Customer and Taxpayer Bailouts in Private Infrastructure Projects: Policy toward Leverage, Risk Allocation, and Bankruptcy (Working Paper 3274). Washington, DC: World Bank. |
The following resources provide further guidance and examples of risk management approaches:
• The South Africa PPP Manual module on contract management [#219, pages 20-24] describes how risk monitoring and management should center around a risk management plan
• The Partnerships Victoria Contract Management Guide [#20, pages 49-54] describes the monitoring information-beyond KPIs-that the government will typically collect, to monitor risks to the sustainability of the contract.