Risk Management in Transport PPP Projects
In the Islamic Countries
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allowing for quicker and more efficient check-in, baggage drops or security checks (Global
Infrastructure Hub, 2016).
The force majeure risk consists in external events beyond the control of the parties (such as
natural disasters, war or civil disturbance) affecting the project. It is typically shared between
the private and the public party. As a mitigation measure, project insurance can be put forward
in order to mitigate force majeure risks causing physical damage and loss of revenue coverage.
These five illustrative risks, as well as the other threats potentially materializing during the
operation phase, need to be subject to a strict monitoring process covering the whole duration
of the operation phase, which represents a prerequisite for their effective mitigation or
treatment.
Bonus/malus schemes
As foreseen during the contracting stage, in a transport PPP remuneration of the private party
is linked to the project’s performance. At the operation stage, in case the outputs or targets
provided for in the contractual arrangement have not been achieved, this link can translate into
penalties (or fines) for the private party. Concretely, penalties can be put in place through
deductions on payment, or fines to be paid by the private party. Vice versa, if the targets have
been achieved, bonus payments might be delivered by the public authority to the private party.
These schemes can be applied for both government-pay and user-pays PPPs (The World Bank
et al., 2017).
Contract renegotiation
Due to the impossibility to anticipate all the events that may occur during the contract period
and future scenario, PPP contracts are intrinsically incomplete. Therefore, they may need
adjustment in response of unforeseen events.
Unforeseen events might require a realignment in the project objectives and a new balance of
the risk sharing between public and private parties.
The word “ renegotiation” relates to changes in contractual provisions, often implemented as a
mechanism to avoid project cancellation when unforeseeable events occur. Such changes
represent one solution to ensure risk treatment during the project implementation phase.
The causes of renegotiations are heterogenous. While in certain circumstances a degree of
flexibility becomes necessary and renegotiation is identified as the way to achieve it, in other
cases renegotiations are driven mainly by opportunistic behaviors which undermine fair
competition.
For instance, financial and macroeconomic shocks may undermine the initial project idea (as
PPPs entail large sunk investments and a great exposure to financial market to finance them)
and ultimately require contractual changes. An inadequate contract set-up, due to inexperience
and mistakes in the contract design, or because of a poor regulatory framework, may lead to
necessary contract renegotiations as well. Further, weaknesses in risk simulations used during
investment appraisal may lead to risk underestimation and consequently the private party to
seek renegotiations aiming at more support from the government.