Risk Management in Transport PPP Projects
In the Islamic Countries
45
Table 12: Usual risk matrix in transport PPPs (by risk category)
Risk type Risk category Usual allocation of risks (public/private/shared)
Context-
related
risks
Political and
legal risks
Political risks fall mostly on the public sector: typically, the public party
bears responsibility for political events outside the control of the private
partner. The public party bears more responsibility for regulatory
changes as well, but there is a degree of risk sharing, as the private party
may not be compensated for changes in law that affect the whole market
equally (e.g. taxation).
Macroeconomic
risks
Macroeconomic risks are mostly shared. In particular, inflation risks
during construction are typically borne by the private partner, while
inflation risks during the concession term will typically be primarily
borne by the public authority.
Project
risks
Financial credit
risks
Credit risks fall on the private sector, as they are inherent in the strategic
decision to invest in a specific market or in the projects promoted by a
specific authority.
Design,
construction and
operation risks
Design, construction and operation risks are generally borne by the
private sector. A first exception is represented by the risk of damage to
the environment, which are generally shared by the private and the
public sectors. Second, land purchase and site risks are generally borne
by the public sector, which is best-placed to select and acquire land.
Financial
sustainability
risks
Financial sustainability risks are generally borne by the private sector.
For toll roads, in the past demand risk used to fall on the private sector
as well; however, in recent years and based on experience (traffic
forecasts falling short on expectations7), it has become common for
public authorities to retain demand and toll revenue risk, particularly in
the absence of in-depth traffic analysis.
Other risks
(force majeure
and early
termination)
Force majeure and early termination risks are shared. The ability of the
private partner to bear force majeure risk is limited, and the public
sector typically bears the risk after a certain period of time or level of
cost.
Source: Authors.
Performance metrics
PPPs, as already mentioned, have one defining feature in their focus on outputs (i.e. service
delivery) rather than inputs (e.g. technical requirements). As such, measuring their performance
is key to the management of PPP contracts, and setting clear performance targets or output
standards represents only part of the task. In fact, the PPP contract should also specify how the
performance will be monitored and assign clear responsibilities for that purpose. Performance
metrics, however, are hardly consistent across infrastructure projects, and this constitutes a
factor significantly hampering comparability and meta-evaluation of PPPs.
7 Forecasting future demand for transport infrastructures is a notoriously complex task influenced by numerous
interrelated factors (including competing modes of transportation, demographic shifts, economic conditions,
the cost of the services to the user, convenience, individual preferences and speed). This often translates into
overly optimistic demand leading to financial loss for the party managing demand risk (Delmon, 2010).