It is very important for both public and private parties to understand and address the risks involved in a Public-Private Partnership (PPP) projects. In any PPP project risks are more common but promoters will show interest in such projects only when the risks in the project are less than the reward which the project gets.
Risks in Public-Private Partnership Projects
The risks involved in PPP projects are of several types
- Construction Risks
- Operating Risks
- Design Risks
- Market and Revenue Risks.
- Legal Risks
- Financial Risks
- Political Risks
- Force Majeure Risks
- Environment Risks
1. Construction Risks
Construction risks in PPP projects are related to several individual factors which effect the construction of infrastructure of project. Some risk factors are discussed below.
Estimated Cost vs. Real Project Cost
In most of the cases, The real project cost may overrun the estimated cost of project due to several reasons such as inefficient working, delay in agreement approvals by public sector, modifications in design, new taxes etc. Most of the times private parties are involved with this type of risks.
Project Completion Time
This risk is also taken by the private parties such as contractors whose responsibility is to complete the project with in the given time.
Standards of Construction
With proper supervision good standards of construction can be obtained. So, this can be prevented by routine inspections by the public sector.
2. Operating Risks
Operating risks are related to operations and maintenance cost of infrastructure of project. In general private parties take the responsibility of operating risks unless there is increase in due to new or increased taxes. Regular periodic reviews and adjustment of charges will improve sustainability of long term PPP projects.
3. Design Risks
Design risks are related to any mistakes or defects in the design specifications or in the design of structural elements. If there is any damage of structural element, then it is difficult to decide that the damage is due to mistakes in design parameters or the very design itself.
The design risks are generally with in the control of design contractor. So, during the design the design contractor should take the responsibility to eliminate this type of risks.
4. Market and Revenue Risks
If a project is not able to get the revenue which it would actually generate then it is considered as revenue risk. A PPP project may face the market and revenue risks due to any of the following reasons.
Insufficient Income from Fares or Tolls
The revenue risk may occur when sufficient income is not available from fares or tolls. In this case the private sector can request a cash compensation from the public sector. It also can request the public sector to increase the fares or tolls or to extend the concession period.
Insufficient Income from Other Operations
If revenue risk is involved due to insufficient income from other operations, then also private sector can request the government to extend the concession period.
The government will support a PPP project when it has sufficient traffic levels. If there are unsatisfactory traffic levels then the government will not provide any compensations to the project.
5. Legal Risks
Legal risks may occur in public-private partnership projects due to many reasons and some of them are as follows.
- Property Lease issues
- Ownership assents
- Breach of documents
- Financial failure of private sector
- Corporate and security structure
6. Financial Risks
In General, Funds will be raised for projects which requires large working capital. Financial risks are involved at this stage in two ways. Both the parties need to consider these risks seriously.
Exchange Rate Risk
Exchange rate risks are occurred when there is an involvement of foreign currency exchange or international finance in the project. The exchange rates of International currency are unstable in many developing countries, so this risk should be considered.
Interest Rate Risk
Interest rate risk is involved when a large amount of money is borrowed for the project at variable interest rates. To reduce this risk, the money should be borrowed at fixed interest rate. Also it is important to estimate loan period which should be more than the length of project otherwise the interest rate risk may increase after load period.
7. Political Risks
The PPP projects may also have to face political risks from public sectors such as present government, opposition government, country’s legislature etc. The political risks involved are as follows
- Nationalization of project
- Tax increment
- Payment failure by public sector
- Delay in approvals from public authority
- Termination of private sector by public sector
8. Force Majeure Risks
Force majeure risks are generally unrelated to the project. They cannot be controlled and prevented by any of the parties of project. The general force majeure risks are due to
Natural Force Majeure Events
Natural forces include natural disasters such as floods, earthquakes, cyclones etc. These risks cannot be prevented but prior safety precautions may help the project but cost of project may increase. This increase in cost is equally shared by both the parties.
Direct Political Force Majeure Events
Direct political events such as exploration, nationalization also effect the project.
Indirect Political Force Majeure Events
Indirect political events occurred where there is unstable political environment. War, riots etc. are come under Indirect Political Force Majeure risks.
9. Environment Risks
Environmental risks are related to the effects on environment during the implementation of project. It is important to check if there is any presence of strict environmental liability with in the project zone.
Proper planning is needed in such a way that the project should fulfill the current environmental legislation. It is suggested to submit the report and take the permission from environmental authorities prior to beginning of a project to avoid the risk of penalties or extra charges etc.