Minimising Financial Risk in Infrastructure PPP Projects

Recent practice in Private Public Partnership (PPP) transport projects has seen the participating governments and public agencies gradually moving from demand-based contracts to availability-based ones. These latter agreements see the public partner bear the financial implications of actual demand being either over or under that forecast, while risks associated with construction and service availability are transferred to the private partner fulfilling the contract.

Civil engineering consultancy Solvĕre has developed a methodology to enable the partners involved in PPP infrastructure projects to minimise their financial risks by accounting for each element of the project that can affect its financial status and therefore profitability. To do this Solvĕre uses @RISK to estimate the performance and to forecast the potential deductions in the payment mechanism for each project. (How much and at what intervals the government pays the contractor is determined by the ‘payment mechanism’. This relates to the quality of the service provided by the private partner whose revenue is therefore dependent on its performance score and the incentive or penalty rules of the contract).

The key objective is to quantify, for various levels of probability, the economic impact of the performance criteria not being met. Solvĕre’s @RISK model takes into account the contract specifications and the resources committed by the operator to complete the project and undertake maintenance of the infrastructure, combining them in order to evaluate the expected level of performance on this base scenario.

Solvĕre believes that the highly-complex nature of PPP contracts, coupled with payment mechanisms being subject to a significant degree of uncertainty, requires in-depth analysis in terms of probability and risk. Using @RISK, it has developed a way to do this, thereby enabling informed decisions regarding the feasibility of the project and a proper risk allocation between the partners.

» Read more about Solvĕre's use of @RISK

 

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