Life cycle oriented risk management for PPP-projects in public real estate

© Chair Construction Economics - Bauhaus-Universität Weimar 2008 1

Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar

Life cycle oriented risk management for PPP-projects in public real estate

June 26th, Workshop Session 5K - PPPK. Leidel, Bauhaus-Universität Weimar

Royal Institute of Technology (KTH), Stockholm

EUROPEAN REAL ESTATE SOCIETY Conferences 2009STOCKHOLM, JUNE 24-27TH 2009



Introduction

Risk management is

‘the culture, process and structure, which come together to optimise the management of potential

opportunities and adverse effects’

part of the definition of risk management by the Australian/New Zealand Risk Management Standard (AS/NZS 4360:2004)



Outline

Need for action1

Areas of investigation I Research methodology2

Overall concept and next steps 3

Discussion



Risk management in PPP projects:

Complexity of life cycle oriented projects

Lack of historical data and information

Insufficient risk awareness of project stakeholders

Lack of common understanding of risk

High uncertainty in application of techniques and methods

Low transparency of decision criteria and the decision-making process

Lack of consistency in dealing with risk

Need for action - status quo



PPP Risk management

Projectlife cycle

Project stakeholders

Risk management process

Stage-specific risk profile at different project stages:Amount of risk expenseCapability to influence riskConsistency of revenueUpside potential

Project stakeholders differ in their:ObjectivesFunctions throughout the project lifecycleRisk perceptionRisk willingness to take risksRisk capability to bear risk

Sub-processes differ in: Organisational and operational requirements The extend of available information and data Applicability of reasonable methods and

techniques

Areas of investigation



► Literature research Few available literature/previous studies in Germany, e.g.

Elbing, Risikomanagement für PPP-Projekte, 2006

Pfnür , Risiken immobilienwirtschaftlicher PPPs aus Sicht der beteiligten Akteure, BPPP, 2006

Pfnür/ Schetter/ Schöbener, Risikomanagement öffentlicher Infrastrukturinvestitionen in Public Private Partnerships – wissenschaftliches Gutachten im Auftrag der Initiative Finanzstandort Deutschland, 2008

► Qualitative content analysis to identify risk

Research methodology



► Empirical study: qualitative and quantitative survey 12 expert interviews

Questionnaire for all principal PPP stakeholders in Germany

577 respondents invited to participate

53 completed the survey

response rate: 9%


Stakeholders’ specific structure and process of risk management

Application of methods willingness to bear relevant

risk risk management strategies



Areas of investigation – stakeholder perspectives

Public principal

Debt funder

(General) ContractorDesigner/ Consultant

Project company/ SPV Equity provider

Project agreement/PPP contract

Loanagreement

Construction contract

Shareholder agreement

Service contract

Operation/ FM contract

Private sector

Public sector

Operator

Sponsors

Institutional investors

Lending banks

Development finance institution

► Who are the principal stakeholders?



Areas of investigation – stakeholder perspectives

Stakeholder Objectives ContributionsPublic principal

Efficiency gain Leveraging of government budget Acceleration of the project Better service quality Compliance with requirement and

regulations

Concession/ licences Service fee

Equity providerSponsors Adequate rate of return

Strategic potential (e.g. extension of business, diversification of project-or risk portfolio)

Equity or mezzanine capital Project development,

management and professional competence and experience

Investors Maximising of return Diversification

Private equity Quality control Financial competence

Debt funderLending banks Loan repayment

Careful financial evaluation Debt Monitoring of quality Financial competence

Development finance institutions

Loan repayment Support of development goals

Contractor/ facility manager and operator (incl. design)Construction/ general contractor

Sufficient margin

Required construction work Turnkey fixed-price contract

Facility manager and operator

Required service Fixed-price contract



Preparation and Conception

Tendering and Awarding

Construction

Operation

Exploitation

Capability of influencing source

and effect of risk

Amount of risk expenses

Consistency of revenue Upside potential

low I medium I high

Specific risk profile per project stage

low I medium I high

low I medium I high

low I medium I high

low I medium I high

Areas of investigation – project life cycle



Risk before risk management

Identifiedrisk

Assessedrisk

Risk afterrisk management

Riskidentification

Risk analysis and assessment

Riskallocation

Risks remaining with public principal

Risks transferred to private partner

Riskmitigation

Risk control and monitoring

Discover and describe all the risks relevant to the project

Quantitative determinationof the degree of likelihood and the possible consequences

Assigning the responsibility of risks to the party best able to manage it

Risk response planning;development andimplementation ofrisk strategies

Prevention

Transfer

Reduction

Acceptance

e.g. risk matrix

negatotiation

e.g. risk checklists

Ongoing review and control of developments and changes

Monitoring of theRisk management system

Risks not identified

Documentation, control, monitoring

Global risks Project specific risks

Areas of investigation – risk management process



Overall concept for PPP risk management

Risk identification

Risk analysis &assessment

Riskallocation

Risk control &monitoring

Processes of risk managem

ent

Princip

al sta

keholders

Life cycle of a PPP project

Construction Exploitation OperationTendering & Awarding

Preparation & Conception



► Further investigations

Development of a risk management process definition of sub-processes, e.g. detailed risk allocation process

Assignment of responsibilities

Identification and describing reasonable techniques and methods to deal with risks

Allocation of risk strategies available to risks and stakeholders

Increasing risk awareness among the participants

Next steps



Thank you for your attention!

Discussion



► Empirical study




Rank

Risks’ importance based on the perception of

Public principal Debt funder Equity provider Contractor-Operator

1 Demand risks Risk of Insolvency of the contractors

Technical implementation risks Design risks

2 Tendering and awarding risks

Risk of the insolvency of the principal

Insolvency risks of the contractors Management risks

3 Site risks Income risks Management risks Approval risks

4 Force majeure Demand risks Financial risks Tendering and awarding risks

5 Risks of changes in law Financing risks Operating risks Contract risks

Life cycle oriented risk management for PPP-projects in public real estate

Documents