REPORT ON

Ex-post Risk analysis in

Public Partnership
projects
 SUBMITTED TO:
SIR-YASIR ABBAS
SUBMITTED BY:
HINA ZAHEER 012
RABEAH AKBAR 054
NEELUM SHAHZADI 026
(REP)GULAM ZAINAB 14(054)

REPORT

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[Company address]
 Ex Post Risk Analysis in
Public- Private Partnership
Projects

Introduction:
A public/private partnership (PPP) may be defined as “a long-term relationship between
public and private sectors that has the purpose of producing public services and
infrastructure” Public/private partnerships bring public and private sectors together in long
term contracts. PPPs (public/private partnership) encompass voluntary agreements and
understandings, service-level agreements, outsourcing and private finance initiative. A PPP
projects therefore usually involves the delivery of a traditional public-sector service and
can encompass a wide range of options. General idea of that concept is to mobilize to use
private sector capital to generate economic development, and to deliver value for money
to the public sector, because public sector has limited public funds to meet current and
future need
However, PPP popular is world-wide, it brings along with it some risks which both the
public sector and the private sector, including the users of public goods and services, need
to address and manage. Most of the projects are undergoing PPP but all are not being
successful. Failure of some of projects is due to some risk factors which are not studied
before or during the implementation of the project. Risk management in PPP projects
should include ex post risk analysis. Ex post mean period after the signature of project
agreement
Two obligations in the risk assessment and management of a PPP project come to mind.
First, the requirement for a risk transfer mechanism in PPP arrangements; the risks to be
transferred should be identified, analyzed and probably priced. Secondly, PPP procurement
methods are associated with many pitfalls, uncertainties and risks to the governments and
the private sectors. The aim here is to provide to concept about ex post risk analysis and
management in PPP project.

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 BACKGROUND

The concept of PPP:

The PPP Knowledge Lab defines a PPP as "a long-term contract between a private party
and a government entity, for providing a public asset or service, in which the private party
bears significant risk and management responsibility, and remuneration is linked to
performance. Definition by Forrer, Kee, Newcomer & Boyer (2010) Public–private
partnerships are ongoing agreements between government and private sector organizations
in which the private organization participates in the decision-making and production of a
public good or service that has traditionally been provided by the public sector and in which
the private sector shares the risk of that production.
"PPP is a broad term that can be applied to anything from a simple, short term management
contract (with or without investment requirements) to a long-term contract that includes
funding, planning, building, operation, maintenance and divestiture. PPP arrangements are
useful for large projects that require highly-skilled workers and a significant cash outlay to
get started.

Why do government use PPP:

The financial crisis of 2008 onwards brought about renewed interest in PPP in both
developed and developing countries. Governments have increasingly employed PPPs in
the last few decades to finance and manage complex operations. Osei Robert mention five
reason for using PPP by government are: ‘reduces public sector administrative cost’,
‘allows for shared risk’, ‘reduces the problem of public sector budget constraint’, ‘private
sector possess better mobility’ and ‘private sector has ability to raise funds for project’.

Construction public private partnership

project:
The whole concept of Public Private Partnership is a government policy to tackle financial
problems in facility provision, and an integrated private management skill to increase
efficiency, effectiveness and quality.

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There are Eight types of PPPs as follows:
Asset Sales which relates to the sales of surplus public-sector assets.
Wider Market which deals with introducing the skills and finance of the private sector
to help with better use of the asset in the public sector.
Sales of Business, which deals with the sales of shares in state owned business by
flotation or trade sale.
Partnership Companies, which is about introducing private sector ownership into
state owned business, while still preserving public interest through legislation,
regulations, etc.
Private Finance Initiative, is a way of creating "public–private partnerships" (PPPs)
where private firms are contracted to complete and manage public projects.
Joint Ventures in which public and private sector partners pool their assets together
under joint management.
Partnership Investments in which the public sector contributes to the funding of
investment by private sector parties, to ensure that the public-sector shares in the return
generated.
Policy Partnerships in which the private sector individuals, or parties, are involved in
the development, or implementation, of public sector policy.
What is obvious from the list is the fact that all the eight models of PPP proposed are not
useful for construction facilities and services provision.
The construction PPP can be categorized as follows:
Service contracts - Purely service contracts in the construction industry are seen as those
where the private sector alone contributes to the service, without further capital input. The
contract arrangements are as operation and maintenance, design build, turnkey contract, or
design, build and major maintenance.
Service contract based on public facilities - The second group is characteristic of the
private sector operating the facilities. The procurement methods could be design, build and
operate (DBO); and lease, develop, operate (LDO). There is some temperate “nominated”
ownership, such as build, lease, operate, transfer (BLOT); build, operate, transfer (BOT); or
build, transfer, operate (BTO); and build, own, operate transfer (BOOT).
Private sector permanent provision - The permanent privately ownership of public facilities
arrangements is build, own, operate (BOO); buy, build, operate (BBO), or divestiture
(privatization).
Special Vehicles – Joint Ventures (JVs) - Like business arrangements, there is another
arrangement of both public and private sector participation together – joint venture, which
includes equity JV, co-operate JV and consortium. The private and public sectors share the
liability and return from the same JV Company.

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 Risk &PPP

Risk and PPP:

Risk is the probability of the occurrence of a harmful event (Hwang, Zhao, Yi, & Zhong,
2015; Parker & Handmer, 2013. Risk management with respect to PPPs is a potential factor
contributing to efficiency. It consists of a structured approach to the identification,
assessment, and control of risks that emerge during the policy, program, or project lifecycle
(HM Treasury, 2003a). The identification of the source of risk is required to effectively
manage risk.2 Additionally, the responsible party for risk at each project stage and the
management strategy for minimizing the potential negative consequences of the risk during
the entire project life must be determined.

Levels of Risks:
There are various risks associated with PPPs projects. These risks vary with the PPP
project development process the planning stage through the design, construction, and
operation stages. A checklist of risks associated with a PPP projects could be classified
on the basis of three-levels of risk factors: Macro level, Meso level and Micro level.
These levels of PPP project risks are summarized as follow:
The Macro level of PPP – these are risks at ecology level. This will focus on the PPP
national or industry level variables. The risk at this level is often associated with political
and legal conditions economic conditions and social conditions.
The Meso level of PPP – these are risks at project level and represent the PPP
implementation problem such as project demand/usage location design and construction
and technology
The Micro level of PPP – this will present risks between the contradictions in public
and private sector in contract management. The most significant reason for generating this
risk category rests on the fact that the public sector has social responsibility while the
private sector is mostly profit driven for the public interests.

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Main risks on public/private partnership
projects
The main risks of the PPP projects come from the complexity of the arrangements between
public and private sector bodies. The other risks are the complexity of the arrangements
itself in terms of documentation, financing, taxation, technical details, subcontracting,
project delivery, etc. Infrastructure projects are long term projects, and the nature of the
risks alters over the duration of the projects.

Risk in infrastructure project:

 Technical risk, due to engineering and design failures;
 Construction risk, because of faulty construction techniques and cost escalation
and delays in construction;
 Operating risks, due to higher operating costs and maintenance costs;
 Revenue risk; e.g. due to traffic shortfall or failure to extract resources, the volatility
of prices and demand for products and services sold (e.g. minerals, office space etc.)
leading to revenue deficiency;
 Financial risks arising from inadequacy hedging of revenue streams and financing
costs;
 Force majeure risk, involving warned other calamities and act of God;
 Regulatory/Political risks, due to legal changes and unsupportive government
policies;
 Environmental risks, because of adverse environmental impacts and hazards;
Project default, due to failure of the project from a combination of any of the above.

The public sector is expected, in conjunction with the private sector participants, to identify
potential risks which will arise throughout the life of PPP project. Maintained that firstly
the source of risk must be identified; and secondly its effect must be assessed or analyzed.
The risks must be capable of being divided into those to be managed by the private sector
participants, those by the public sector and those by a third party to the PPP project.
The government needs to be able to assess its own risk exposures. In addition, the private
sector should be able to model the risks and evaluate the company’s ability to deal with
these risks, using the two dimensions of severity and frequency to measure the risk impact.
There is a tendency that the private sector will price the risk and pass this to the public
sector in the form of a bid. If the cost of the risks is acceptable to the public sector, a
contract will be easily awarded. If the private sector’s charge is considered high, the public

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sector may need to go into a form of negotiation with the private sector, and consider
whether to accept the higher risk cost, or share the risks, or retain the risk in the public
sector. Bennett(1998) recognized that direct negotiation between a private company and
the public sector must be designed to prohibit corruption and get the best value for the
public. It is possible that the concerns with a higher risk will lead to the public sector
deciding not to develop the project under a public-private partnership
Risk analysis techniques are used to determine the value of risk. These techniques can be
classified as qualitative, semi-quantitative and quantitative. The research on risk
management confirmed that qualitative and quantitative methods jointly, or (semi-
quantitative), are as important as quantitative analysis. Some of the risks, like macro and
micro level risks, are still very difficult to analyze and assess quantitatively. These risks,
identified for PPP projects, can be analyzed using qualitative assessment of the likelihood
of the risk.

Ex Ante and Ex Post Risk

MANAGEMENT
Risk management in PPP projects should include both ex ante and ex post risk man-
agement. Ex ante here means the period before the signature of project agreement, whereas
ex post means after. This expression is extensively used in economics, especially in
contract theory literature). Generally speaking, if a contract is treated as a complete con-
tract, risk management can be seen as solely ex ante. This is because, according to the
complete contract theory, all contingencies can be forecasted and prespecified in contacts.
But if a contract is regarded as incomplete, risk management should involve the concept of
ex post risk management. This is because according to the incomplete contract theory, it is
impossible to resolve all risks in an ex ante way and those unresolved risks should be
handled by ex post risk management. Some risks should be left unsolved deliberately and
referred to ex post adjustments because it is too expensive to forecast and prespecify them
in an ex ante way. It has been well-accepted that PPP agreements are typically incomplete
contracts due to their long-term span, large scale, and complex nature
Previous studies have investigated the ex-ante risk management of PPP infrastructure
projects, focusing on risk identification risk evaluation, risk allocation financial risk, and
political risk However, few studies have focused on the ex post risk management in PPP
infrastructure projects. Thus, this study can contribute to the literature through developing
a quantitative ex post risk management model.
A general ex ante risk management process was developed by the Project Management
Institute (2000). This process consists of risk management planning, risk identification,
qualitative and quantitative risk evaluation, risk response, and risk monitoring and control.
Compared with ex ante risk management, ex post risk management takes place after serious

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risk scenarios occur. In the discipline of public management, ex post risk management is
usually referred to as “hazard management” The terms “hazard” and “risk” are often used
interchangeably. However, “hazard” is usually an ever-present condition that leads to a
harmful event, whereas risk can be seen as the probability that the exposure to a hazard
will lead to a negative consequence. After serious risk scenarios occur, the exposure is
known. Therefore, the ex post risk management can follow the practice of hazard manage-
ment. While hazard management normally focuses on natural disasters, ex post risk
management mainly tackles man-made accidents in PPP infrastructure projects.
Hazard management comprises a series of stages including the evaluation of hazard impact;
the evaluation, selection, and implementation of hazard reduction measures; and the
establishment of enforcement procedures Similarly, the general ex post risk management
process, as illustrated in Figure 1, includes risk impact evaluation, serious risk scenarios
justification, ex post risk response, and renegotiation/early termination enforcement. After
risks occur, risk impact evaluation is used to summarize the losses of affected stakeholders.
If the risk impact is under risk tolerances, the affected party is supposed to retain the risks
and no ex post risk response measures will be taken. However, if either the commercial or
the production risk tolerance is exceeded, the affected party would take the ex post risk
response measures to avoid further losses.
The ex post risk response is also called risk reallocation, which allows the excessive risk
impacts to be distributed among the stakeholders. With respect to risk response strategies,
risk mitigation focuses on prevention, and risk retention takes no measure. Therefore,
available ex post risk response strategies are risk avoidance and risk transfer. The ex post
risk response measures can be categorized into two groups: (1) renegotiations, where the
affected party is compensated and the risks are transferred to other parties through
substantial change in tariffs (standard, scheduled tariff adjustments excluded), investment
plans and levels, exclusivity rights, guarantees, lump-sum payments or annual fees,
coverage targets, service standards, and contract periods and (2) early terminations, where
the government or the new contractor pays an amount of compensation to the original con-
tractor and takes over the concession rights and project assets, and the future risks are
avoided through giving up the original concession. Normally, the parties try their best to
rescue the project through renegotiation at first, and early termination is the last choice
when renegotiation fails.

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Conclusion:
PPP is an arrangement whereby the private sector is able to take part in the government’s
responsibility for the provision of public facilities. A PPP project is associated with many
levels of risks. As the PPP projects are risky from the different viewpoint of both public
and private partner, due to different key success factors, risk analysis and management
should be the main activity for managing these projects. A use of risk negotiation technique
as an integral part of the process of risk analysis. Experiences of PPP suggest that the public
sector will still retain a large amount of risk, especially those at Marco level; while Meso
level risks are assigned to the private sector. Confronted with serious risk scenarios, ex post
risk management can reduce the excessive risk impacts and bring the project back to
appropriate operation. Different ex post risk response measures have different reduction
effectiveness and enforcement characteristics in application. The ex post risk response
measures in concession renegotiation and early termination were discussed in detail as
well.

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