Risk Management in Ppp Projects

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Risk Management in PPP ProjectsMormugao, 21st September, 2007


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Agenda Overview of Risks in PPP Contracts

Types of risk

Mitigation strategies

Case Studies

Mumbai Pune Express way

Mundra Port

Mumbai Metro

Conclusions


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Sources of RiskGovernment

Target Market

Devel

opers

Risks in a typical

PPP project

Demand

Legal & Regulatory

Framework

Contracts

Construction

O & M


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Risks in PPP ProjectsPolitical

Force Majeure

Risk

Market Risk

Regulatory

Operational &

Maintenance

Financial Risk

Cost OverrunRisk

Land Acquisition

Risk

Commercial

Technology Risk Construction

Risk

RISKS

RISKS


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Risk Categories, Phase of Dominance and Allocation

- Social risk

- Nationalization or revocation

- Events of warsInstitution/Private partyThroughout Project Cycle

Political & social risk

Institution/Private partyConstruction/Operations PeriodEnvironmental risk

Institution/Private partyThroughout Project CycleForce Majeure

Private partyThroughout Project CycleInsolvency and outside creditor risk

Private partyOperations PeriodTermination risk

- Inflation risk

- Tax rate change risk

- Foreign exchange exposure risk

- Interest rate riskPrivate partyOperations Period

Financial risk

Private partyOperations PeriodOperations & maintenance risk

Private partyOperations PeriodCommercial risk

Institution/Private partyOperations PeriodRegulatory & administrative risk

Private partyConstruction/Operations PeriodTechnology riskPrivate partyConstruction PeriodProject cost risk/Cost over-runs

Private partyConstruction PeriodProject completion risk

- Planning risk

- Design risk Private partyProject Development

Delays in project developmentInstitution/Private partyProject DevelopmentLand acquisition

Allocation of riskPhase of dominanceRisk Categories


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Risk Mitigation StepsDetermineSeverity of

Risk

AllocateRisk

Mitigate theRisk

IdentifyRisk

Price theRisk

Identifying

the eventsor Actions

which

Effects the

Viability of

the Project

In Case the

Event occurthe effect of

the same on

the cost /

time of the

project

Identifying

and

allocatingthe risk to

the party

who can

manage it

best

Steps /

actionswhich can

be taking to

reduce the

chances of

the eventoccurring

Cost ofaddressing

the risk have

to be

determined


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Management of Risks What ?

Time and Cost Overruns or shortfall in performance parameter of

the competed project

Why? High capital intensity and a relatively long construction period

How to Mitigate? Engineering, procurement, and construction contracts to an

experienced and reputed firm

Provisions for liquidated damages in the contract(s)

Construction Risk


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Technical performance of the project during its operational phase

can fall below the levels projected by investors

Why? Technology is untried or is changing rapidly or inability of the

operator to manage such big and complex project i.e. Metro

How to Mitigate?

Entrusting operation to experienced operations and maintenance

contractors

Provisions for liquidated damages in the contact(s)

Insurance against Force Majeure risks

Operations Risk


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Possibility that market conditions assumed in determining the

viability of the project are not realized. Non fulfillment of demand

projections is an obvious example

Why?

Uncertainty in the forecast of the demand projections

How to Mitigate?

Investors enter into a contract with the monopoly purchaser to

guarantee a minimum level of purchase.

Market/Demand Risk


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Interest rates can vary during the life of the project (construction

and payback period)

Why? High capital intensity (large impact) and long payback periods

(Risk spread over a long time). Interest cost is a large component of

the total project cost

How to Mitigate?

Pass it on to consumers, as, for example, in arrangements in which

the impact of interest rate variations on unit costs are treated as apass-through into the tariff

Using hedging instruments

Interest Rate Risk


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Risk of not being paid for services delivered

Why?

Financial condition of public sector utilities in developing countries

is often very weak. These utilities are often the monopoly / large

buyer for example power and water

How to Mitigate?

Long term solution is to improve the financial condition of the

utilities by improvement in efficiencies or privatization

Short term, guarantee and counter guarantee by state and centralgovernment

Set up an escrow arrangement

Payment Risk


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Any disruption in construction or operation of a project due to

regulatory changes

Why? Infrastructure projects have to interface with various regulatory

authorities throughout the life of the project, making them

especially vulnerable to regulatory action

How to Mitigate?

By establishing strong and independent regulatory authorities that

operate with maximum transparency of procedures within a legalframework that provides investors with credible recourse against

arbitrary action

Regulatory Risk


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Any disruption in construction or operation of a project due to

political decisions

Why? Infrastructure projects have high visibility, and there is always a

strong ele-ment of public interest. This makes them vul-nerable to

political action that can interrupt or upset settled commercial

terms; in extreme cases it can even lead to cancellation of licenses

or nationalization.

How to Mitigate? Partially mitigated through political risk insurance offered by

multilateral organizations, such as the Multilateral Investment

Guarantee Agency, or bilateral investment protection agreements.

Political Risk


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Typical Risk Allocation in India

NoNoNoNoNoYesSub-

ContractorEPC Contractor

YesNoNoNoNoNoAwarding

AgencyGovernment

NoYesNoNoNoNoLenderLenders

YesYesYesYesYesNoPromoterEquity Holders,

Developer

RegulatoryRisk

Interest

RateRiskMarketRiskRevenueRiskOperationRiskConstructionRiskRoleRiskParticipants

Developer carries all type of risk in India unlike UK and

other Latin American Countries where governmentguarantee minimum revenue and share the same also in

case that exceeds threshold limit


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Management of Risks

HighHighProjectSpecific

LowLowMediumPower

MediumLowProject

Specific

HighHighHighAirport

LowLowProjectSpecificMediumMediumHighPort

MediumMediumProject

Specific

Project

Specific

LowHighRoad

Regulatory

Risk

Payment

Risk

Interest

Rate Risk

Market

Risk

Operation

Risk

Construction

Risk

Type of

Project

Market Risk versus Payment Risk


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Types of risk


Case Studies


Mundra Port

Mumbai Metro

Conclusions


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Mumbai Pune Expressway Total Project Cost

Rs 2136 crores

Initial estimate

Rs 1600 crores

Time taken

3 years

Physical land acquired

1030 ha

Contractors appointed:

IJM / SCL Joint Venture

Hindustan Construction Co. Mumbai

Larsen and Toubro Ltd. Mumbai

V.M. Jog Engineering Ltd. Pune

Konkan Railway Corporation Ltd

Operation & Maintenance:

Ideal Road Builders (IRB)


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Mumbai Pune Expressway

Risks borne by MSRDC

Land acquisition

Specific project clearances Political

Non-insurable Force Majeure

Water & Power Availability at

source Project completion

Risks borne by Private party

Design

Construction Operation & Maintenance

Project cost

Financing

Revenue

Technology

Insurable Force Majeure

Risk Allocation


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Mumbai Pune ExpresswayRisk mitigation by MSRDC

Different consultants appointed for

the purpose of detailed engineering

and for construction supervision ofworks

Land acquisition and clearances for

tree felling, forest clearing etc.

obtained beforehand

Environmental impact assessment

carried out by external agencies

Strong political will

Providing power through 8 MSEB

substations Removing/diverting utility service

lines (power, telephone, water &

sewer) coming in alignment

Risk mitigation by Private party

Pre-approved designs for the

respective road segments Financial SOPs from GoM (Tax,

imports etc.)

Contractual and legal shield

Employing state-of-the-art

technology for carrying out theconstruction work

Subcontractors working under tight

clauses

Absorption of certain costescalations by MSRDC


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Mumbai Pune Expressway Total Project cost

Rs 2151 crores

Multi-terminal greenfield portdeveloped through PPP by the state of

Gujarat

Commenced operations in 1999

Traffic is at 8 MMTA

Was one of the first ports to securerail connectivity by putting up the

investment for it through PPP (Rs 136crores)

Private party

Gujarat Adani Port Ltd. (GAPL) and P&O


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Mumbai Pune Expressway

Risks borne by GoG/GMB

Revenue

Regulatory & administrative Political & social

Creditor

Environmental


Design & Construction

Operation & Maintenance Subcontractor

Financing

Revenue

Financial

Technology

Environmental

Connectivity Rail, Road

Risk Allocation


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Mumbai Pune ExpresswayRisk mitigation by GoG/GMB

Traffic risk sharing

Required clearances obtained

beforehand

Transparent and clear-cut

BOOT policy in place

Sustained political support to the

non-major port development

cause

Various bodies constituted for

reviewing and monitoring the

PPP process


30 years Concession agreement

with GMB Future development rights and

sub-concession contracts

Tariff set by P&O (independent

of TAMP) Developed own rail connectivity

Heavy machinery & equipments

taken on lease basis

GAPL sold stake to P&O ports


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Mumbai Metro Total Project cost

Rs 2356 crores

First phase

2006-11

Commencement of Operations

2009-10

Mass transit corridor from Andheri to

Ghatkopar

First MRTS project in India beingimplemented on Public PrivatePartnership (PPP) format

DMRC (Delhi Metro Rail Corporation)prepared the master plan for Mumbaimetro

Private party

Reliance Energy Ltd


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Mumbai Metro

Risks borne by MMRDA

Land acquisition

Force Majeure Environmental

Political & social


Design & Construction

Operation & Maintenance Subcontractor

Financing

Revenue

Financial

Technology

Project completion

Environmental

Risk Allocation


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Mumbai MetroRisk mitigation by MMRDA

Detailed feasibility study carried

out by TEWET in associationwith DE-Consult & TCS, during

1997-2000

Plan updated by MMRDA in

2004

Clearances obtained

beforehand

Deep political backing by GoM


35 years Concession agreement

with MMRDA Contractual & legal shield

Capital contribution of Rs 650

crores with a 70:30 debt-equity

ratio Independent parties assigned

the review and monitoring job

Technical consultants appointed

for planning & reviewing theengineering & construction

phase

Insurance coverage for certain

Force Majeure


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Types of risk


Case Studies


Mundra Port

Mumbai Metro

Conclusions


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Conclusions PPP Projects are complex projects that require effective

attention to risk and their mitigation

Risks are inherently related to returns and theservice/expertise which yields those returns

This gives a good perspective on who is best placed to bear the risk

Objectives of the government in taking up a ppp project is essential todecide who bears a particular risk

PPPs in Western India

Very active as compared to other parts of the country and ever increasingactivity

Activity is mainly confined to transportation sector

However some landmark projects have failed because risks were notproperly identified

Some General Principles in Risk Management

Thoroughness in identification of risks

Lessons from similar projects

Should be borne by party best placed to bear it

Quantification of financial impact to the extent possible

Thoroughness of documentation


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Thank You!

Risk Management in Ppp Projects

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