Risk Management in Transport PPP Projects

In the Islamic Countries

Special arrangements for PPPs

The

in-depth

appraisal

of the PPP project generally takes place after the project has been

clearly identified and screened for PPP suitability. However, in the pre-tendering phase the

distinction between PPP suitability test (addressing the question: is a project suitable for

implementation through a PPP scheme?) and in-depth PPP appraisal (addressing the feasibility

of the PPP project from different perspectives – see below) is frequently nuanced, and the two

tasks can de facto proceed almost simultaneously, mutually reinforcing each other. In some

countries, the screening for PPP suitability is performed after project appraisal, e.g. in Chile (The

World Bank et al., 2017).

Including

appraisal guidelines

within comprehensive PPP guidelines can mitigate deficiencies

in appraisal, contribute to saving time and costs and provide a positive signal to the market, i.e.

of a solid and reliable approach to PPPs (APMG, 2016). Guidance should be provided with regard

to the types of studies that need to be carried out, the respective methodologies and the use of

their results

. Appraisal guidelines can also provide indications on which party is responsible

for performing the different appraisal tasks.

PPP appraisal broadly covers the assessment of the

technical requirements to be included in

the contract

(design and construction requirements as well as performance requirements), the

PPP contract’s preliminary structure

(including the revenue regime and the payment

mechanism as well as a preliminary

risk allocation

) and the

financial model

(considering

macroeconomic assumptions, capital expenditures, operating costs, reinvestments, the cash

flow and the financial structure of the project company). Concretely, it translates into a series of

in-depth studies on the project’s technical, commercial, fiscal, environmental, social and legal

feasibility, as well as in market sounding activities and in the refinement of the CBA (APMG,

2016). While detailing the processes and methodologies used for all these analyses does not fall

within the purposes of this study, it must be noted that during the appraisal phase, the

consideration of risks is of paramount importance. Risk

identification and risk assessment

are key dimensions during appraisal.

Risk identification

refers to the classification of a comprehensive and structured list of relevant

risk events and to their description aimed to clarify the way these risks can potentially affect the

project. Procedures for identifying risks are well established (e.g. the International Organization

for Standardization 31000 Risk Management Standard). During appraisal, it is a good practice

to develop a comprehensive

risk register

, i.e. a document listing and describing risks

qualitatively.

Risk assessment

involves both a quantitative assessment to develop risk-adjusted costs and a

qualitative assessment for the purposes of the preliminary

risk allocation

. Risk-adjusted costs

are estimated by adjusting the planned capital costs and operation and maintenance costs with

the expected risk value, i.e. by multiplying the likelihood of an additional cost with its financial

See COMCEC (2019) for more details on transport project appraisal.