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Guidebook for Risk Assessment in Public Private Partnerships

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Guidebook for Risk Assessment in Public Private Partnerships Guidebook for Risk Assessment in Public Private Partnerships December, 2013 Guidebook for Risk Assessment in Public-Private Partnerships Table of Contents 1 Introduction 1 1.1 This guidebook is part of the FHWA P3 Toolkit 1 1.2 The purpose of this guidebook is to provide an advanced understanding of risk assessment 1 1.3 Risk assessment is crucial in preparing, procuring, and implementing P3 projects 2 1.4 This guidebook focuses on the financial perspective, not the social perspective 3 1.5 This guidebook is developed for transportation staff involved in P3 projects 3 1.6 The structure of this guidebook mirrors the steps performed in an actual risk assessment 3 2 Framework for Risk Assessment 6 2.1 Risk assessment is used throughout the project life cycle 6 2.2 Be clear on the goal(s) of the risk assessment 7 2.3 Project characteristics affect the nature of the risk assessment 9 3 Risk Identification 11 3.1 Risk identification is the foundation of risk assessment 11 3.2 Conducting an excellent risk identification requires proper scoping, completeness checks, detailed descriptions, and prioritization 12 3.3 Process, timing, information, and expertise needed 20 3.4 Output: The identification process produces a risk register 22 4 Risk management 23 4.1 Purpose and principles of risk response planning 23 4.2 Risk management generally focuses on three major steps 23 4.3 Process, timing, information, and expertise needed 25 4.4 Output: Risk management updates of the risk register 26 5 Risk Allocation 29 5.1 Purpose and principles of risk allocation 29 5.2 Several tips and tools for good risk allocation include using VfM as a guiding principle, assessing manageability per actor, and additional criteria 29 5.3 Process, timing, information, and expertise needed 33 5.4 Output: Optimal risk allocation 35 6 Risk valuation 36 6.1 The purpose of risk valuation 36 6.2 Key tips and tools to conduct a good risk valuation include a categorization based on valuation methods, a bottom-up and top-down approach, and use of several valuation methods 37 6.3 Process, timing, information, and expertise needed 47 6.4 Output: Risk valuation quantifies and assigns a value to risks 49 Appendix 1 Bibliography 51 Guidebook for Risk Assessment in Public-Private Partnerships Appendix 2 Determination of the discount rate 54 Appendix 3 Quantitative risk analysis 59 Purpose of quantitative risk analysis 59 Deterministic analysis 59 Probabilistic analysis 59 Appendix 4 Top-down approach for risk valuation 62 Appendix 5 Risk allocation in different delivery methods 63 Appendix 6 Glossary of Terms 65 Tables Table 2-1. Project Characteristics and Risk Assessment .................................................. 10 Table 6-1. Risk Categories Linked to Valuation Method .................................................. 39 Table 6-2. Risk Categories and Valuation Methods ........................................................ 41 Table A-2-1. Categories of Risk ............................................................................... 54 Table A-2-2. Discount Rates ................................................................................... 54 Table A-4-1. Example Checklist Top-down Approach Risk Assessment .............................. 62 Table A-5-1. Example Risk Allocation Matrix .............................................................. 63 Figures Figure 1-1. Value for Money Assessment Tool ............................................................... 1 Figure 2-1. Risk Assessment Steps............................................................................... 7 Figure 3-1. Risk Assessment Identification .................................................................. 11 Figure 3-2. Risk Assessment Scope Definitions ............................................................. 14 Figure 3-3. Risk Identification Workshop Checklists ...................................................... 15 Figure 3-4. Sample Risk Analysis Guidance Chart .......................................................... 18 Figure 3-5. Sample Risk Relation Map (RRM) .............................................................. 20 Figure 4-1. Risk Management .................................................................................. 23 Figure 5-1. Risk Allocation ..................................................................................... 29 2 Guidebook for Risk Assessment in Public-Private Partnerships Figure 5-2. Risk Allocation Principles ........................................................................ 30 Figure 6-1. Risk Valuation ...................................................................................... 36 Figure 6-2. Risk Categorization ................................................................................ 38 Figure 6-3. Valuation Method Decision Tree ............................................................... 46 Figure A-2-1. P3 Organizational Structure .................................................................. 58 Figure A-3-1. Sample Distribution ............................................................................ 61 3 Guidebook for Risk Assessment in Public-Private Partnerships 1 Introduction 1.1 This guidebook is part of the FHWA P3 Toolkit The Federal Highway Administration’s (FHWA) Office of Innovative Program Delivery (OIPD) has developed a P3 Toolkit comprising tools and guidance documents to assist in educating public sector policymakers, legislative and executive staff, and transportation professionals. The P3 Toolkit forms the basis of a broader P3 capacity-building program that includes a curriculum of P3 courses and webinars. The P3 Toolkit addresses both Federal requirements related to P3s and four key phases in P3 implementation: (1) Legislation and Policy Development; (2) Planning and Evaluation; (3) Procurement; and (4) Monitoring and Oversight. 1.2 The purpose of this guidebook is to provide an advanced understanding of risk assessment The FHWA’s P3 Toolkit includes the Guidebook for Value for Money Assessment for Public-Private Partnerships. Risk assessment is one of the inputs for the quantitative analysis in the Value for Money assessment as seen in Figure 1-1. This guidebook is therefore best read in succession to the Value for Money Assessment guidebook. Figure 1-1. Value for Money Assessment Tool Guidebook for Risk Assessment in Public-Private Partnerships FHWA’s P3 Toolkit includes both the Risk Assessment for Public-Private Partnerships: A Primer, and the Risk Assessment Tool and User Manual 1. The primer provides an introduction to risk assessment and risk allocation in the context of Public-Private Partnerships (P3) and Value for Money analysis (VfM). The Risk Assessment Tool is a Microsoft Excel tool that demonstrates how a risk assessment can be conducted. These tools are intended for educational purposes. The evaluation of a specific project requires setting up a project-specific risk assessment. This guidebook is intended to be a detailed follow-on to the primer, and as such covers more challenging and advanced risk assessment topics. It is designed to enhance the overall understanding of the relationship between risk assessment and Value for Money analysis and to provide hands on guidance for practitioners in the field. In addition to this guidebook for Risk Assessment, a guidebook on Value for Money analysis, which is a follow-on to the FHWA primer on VfM assessment, has been developed. The VfM guidebook offers guidance on how to conduct an assessment of conventional versus P3-delivery options. The risk assessment described in this guidebook is an input to the VfM assessment. To make this guidebook as useful as possible to practitioners, it provides an advanced understanding of the practical applications for assessing and allocating project life cycle risks, and addresses the numerous challenges faced when doing so. 1.3 Risk assessment is crucial in preparing, procuring, and implementing P3 projects Well-performed risk assessment is absolutely essential to the successful implementation of P3 projects. A thorough understanding of risk allocation and risk valuation leads to a more accurate VfM analysis, providing decision makers with better information to determine and optimize project delivery alternatives. Proper risk assessment also improves the structuring of innovative P3 contracts because risk allocation can be optimized, allowing those risks to be transferred to (or retained by) the party best suited to handle the risks. The fact that risk assessment is crucial in all project phases does not mean that the assessment should be equally detailed throughout all project phases. In the early phases a high-level risk assessment will suffice, whereas in latter phases—for example when a P3 transaction is being structured or when doing a VfM assessment on the basis of real P3 bids—a much more detailed analysis may be performed. 1 All tools can be found at http://www.fhwa.dot.gov/ipd/p3/toolkit/index.htm. 2 Guidebook for Risk Assessment in Public-Private Partnerships Professional risk assessment has the additional benefit of improving communication and public outreach, since P3 projects may involve public relations challenges. A proper risk allocation and valuation improves the credibility of the P3 analysis and enhances the ability of stakeholders to communicate the pros and cons of a chosen solution to the public at large. 1.4 This guidebook focuses on the financial perspective, not the social perspective The scope of this guidebook is from the financial perspective
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