Public-Private
Partnership
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
1.
Construction Risks
2.
Operating Risks
3.
Design Risks
4.
Market and Revenue
Risks.
5.
Legal Risks
6.
Financial Risks
7.
Political Risks
8.
Force Majeure Risks
9.
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.
Insufficient Traffic
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 affect 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.
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Thursday, 13 September 2018
Public-Private Partnership
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