The Work Team shall value the risks based on historical data or expert opinion, as set out below.
The Work Team shall estimate the probability of cost overruns (including the impact of delays) based on historical data on previous public construction contracts, operation and maintenance (O&M) contracts, and renewal and replacement contracts. When no such data is available, the experience of technical experts shall be used to arrive at the probabilities for such cost overruns (this is generally a percentage of deviation over the baseline project costs). All the assumptions and data sources shall be extensively documented.
The risk valuation analysis depends on the proposed risk allocation envisaged by the draft Privatization Contract as a part of the preliminary contract structure because only the risks transferred to private parties in the Privatization option should be used in the PSC adjustment.
In summary, the Work Team shall undertake the following steps in valuing risks:
a) Estimate the size or impact of the risk.
b) Estimate the probability that the risk will occur.
c) Create a risk matrix which sets out the risk, the size of the risk, the estimate of probability and a probability weighted value (see example - Table 2 below).
The probability-weighted values arrived at in the risk matrix for each specific cost item shall be added as adjustments to the cash flows developed for the initial PSC to arrive at a risk adjusted PSC, based on the timing of those cash flows. For example, in the example in Table 2 below, operating costs would be adjusted by SAR 10m per annum if there were no other adjustments to be made to operating costs.
Table 2 - Example - Valuation of Risks
No | Risk Category and consequence | Size (SAR) | Probability (%) | Probability Weighted value (SAR) | Impact on |
1 | Scope for consultants not clear - cost overruns | 5,000,000 | 20 | 1,000,000 | Construction costs |
2 | Land acquisition - delay and overruns | 10,000,000 | 10 | 1,000,000 | Construction costs |
3 | Capital expenditure increase - cost overrun | 200,000,000 | 5 | 1,000,000 | Construction costs |
4 | Operational phase standards re-defined | 50,000,000 per annum | 20 | 10,000,000 per annum | Operating costs |