Preparation Stage – Planning & Organising
3.3 What are the risks?
All PPPs involve risks to stakeholders. For the partnership to
be effective and sustainable, stakeholders must accept some
risks. However, by careful planning and consultation, risks can
be reduced to low levels that do not threaten the PPP and can be
handled within the partnership arrangement.
The stages for addressing risks that can help in structuring
a successful PPP include:
- identifying types of risks;
- evaluating risks;
- seeking means to reduce or eliminate risks;
- allocating risks to those stakeholders who have the capability
to influence them; and
- sharing any remaining risks.
These stages may be merged or overlap, especially in a small,
short-term PPP. Risk handling can be crucial in large, long-term
The main types of risks are:
- those that relate to implementation;
- those that relate to construction
(if there is to be construction);
- those that relate to operation revenue;
- force majeure; and
1. Political risks
The government and the public sector should state clearly its
policy (which could change) on key risk-related issues, such
as those listed below:
- The level of public support that
will be in place for the private sector to use in its provision
of public services.
- The support for independent regulation and/or review of the
PPP to safeguard consumers and the private operator, especially
in cases of monopolies where the government fixes tariffs. Governments
often wish to retain the right to set tariffs, but these may
be influenced by short-term political considerations. Such a situation can
be perceived as a risk by the private sector, in which case the private operator
is likely to seek a higher income to cover this risk.
- The ability of the public sector to take or share the commercial
risks of the PPP.
Political risks include the consequences and likelihood
of changes in government and the new government withdrawing
support to a PPP. Support by all major parties reduces
2. Implementation risks
These can be reduced by consideration of the following issues:
Have all stakeholders agreed to the PPP?
Objectors can delay
or even stop a PPP going ahead. From the creation stage,
the PPP should be discussed with all stakeholders, but
especially those who consider that they may be disadvantaged
by the process.
Is the implementation programme
defined sufficiently to monitor progress?
The programme should include milestones for starting
activities and completion, plus any intermediate targets
that can be defined clearly. Payment of fees could be
related to achieving milestones.
Are obligations and actions clearly identified, including
a timetable for external review and approval?
Approving agencies should agree time limits in which
they will respond to applications (that are properly
Summary of Actions
A. Plan and agree the process of stakeholder consultation
B. Select a management team and task force
C. Plan and agree a process
D. Select and appoint transaction advisors
3. Construction risks
Where infrastructure is to be developed as part of the PPP,
some construction will be necessary. Risks relating to this
can be mitigated by consideration of the issues listed below:
Can costs exceed the estimate?
Under most construction contracts, the contractor (private
operator) takes the risk for cost overrun if it is related
to aspects under his/her control, such as inefficient
working. However, costs can also increase because of changes
in design, delays in approval/agreement by the public sector,
changes in law, new taxes and so on. Competitive bidding
also increases the risk of underestimating construction
Can completion be on time?
Normally the contractor takes this risk as he/she has
the responsibility for controlling the construction process.
However, he/she could be denied access to land held by
the public sector or may have been given misleading information
on existing infrastructure. Over-optimistic programming
increases this risk.
Is construction to required standards?
Normally this risk is reduced by independent site supervision
on large constructions and routine inspections by the
Does infrastructure meet performance criteria?
Often final testing has to be undertaken at less than the extreme
operating conditions on which the design has been based.
Sound design reduces this risk.
4. Operating risks
These are particularly important for pure operating contracts.
The municipality and the private operator should take account
of the following issues.
Are operating costs more or less than
Normally the private sector takes the risk of higher operating
costs unless the increases are due to causes outside its
control, such as new or increased taxes.
Are operating costs likely to change during
For a long-term PPP, regular periodic reviews/renegotiations
and adjustment of charges will improve sustainability.
Could others also provide the services under the PPP
and thereby reduce sales?
This is more likely where the cost of starting up a PPP
arrangement is low, for example, when there is no significant
initial capital investment. Some exclusivity of service
or area may be necessary for the initial PPP arrangement
in order to protect the private operator, at least for a
5. Revenue risks
These involve risks that the private sector will not receive
sufficient revenue to be commercial. In this respect, parties
to the partnership (particularly the private contractor)
should consider the following:
Could there be fewer customers or lower demand?
Predictions are made in the feasibility study on the amount
of the service or product that people want.
Are customers prepared to pay the
An evaluation of how much consumers or the public sector,
if they take the output, will pay should be made at the
feasibility stage of the PPP. Gradually increasing charges
by a number of small increments reduces their impact compared
with a single rise and reduces the risk of consumers not paying.
Could customers refuse to pay?
The public sector may be reluctant to withdraw a public
service for non-payment, but it has the power of legislating
for penalties and imposing them.
Can the public sector default on payment if it is the sole
On large projects funded by donors, the donors may promise
some support. Increasing the number of sources of revenue
can reduce revenue risks. The private operator may then
lose one source of income, but not others. The extreme
case of many sources of revenue is where the private operator
receives payment directly from consumers. It is most unlikely
that all consumers will decide not to pay, hence this is a
much lower income risk than if the total private operator fee
is paid from one single source.
Do published inflation indices reflect increases in operating
Except for short PPPs, adjustments to charges/prices should
be made regularly in line with local and/or national inflation.
Independent regulation with regular reviews reduces this
Can the public sector increase charges for critical cost
For example, government may increase charges for services
such as water, electricity and materials so increasing
the private operator’s
6. Financial risks
Funds will be raised for PPPs that include building infrastructure
or where large working capital is required. In this respect,
the parties to the agreement should consider the following:
Will changes in exchange rates affect the PPP?
This factor is important when there is international finance
or when an international operator is involved.
Can interest rates vary?
This will depend on the finance package and whether loans
have been made on the basis of fixed or variable interest
rates. Fixed interest rates reduce this risk.
Do loan periods match the length of PPP?
Commercial loans are repaid out of income from the PPP;
therefore the loan period cannot be longer than its duration.
7. Force majeure risks
Events may occur that are outside the control of stakeholders
in PPP. Reducing such risks involves consideration of the
Is there a flood or erosion risk?
Protection works could be included within the PPP, but
would increase costs. Locating on higher ground would
reduce the risk.
Is the PPP vulnerable to earthquakes?
Infrastructure should be designed to withstand reasonable
earthquakes. However, a PPP might suffer more from becoming
unnecessary following an earthquake that leads to a loss
of income - for example, if a municipality suffers severe
damage from an earthquake, collection of solid waste
and street cleaning are no longer a priority. On the other
hand, in such cases PPP resources could be diverted to
general clean-up tasks; this would reduce the risk of
total loss of income.
Is the PPP at risk from riot or general strike?
Could it be a target? Could it be protected? These risks
reduce in a stable political environment.
8. Environment risks
Parties to the PPP should take account of the following:
Does operation affect the environment?
The PPP should comply with current environmental legislation.
Planning should cover compliance with environmental standards
to avoid the risk of penalties and other costs later
Is there any pre-existing and continuing environmental
A thorough check during the planning stage reduces
Often PPP arrangements can cover the impact of risks
by taking out insurance. Following an unexpected event,
the PPP agreement should be reviewed and amended as necessary
so that it can still meet the original, or revised, objectives.