Risk Transfer

One of the most recognizable benefits of a P3 approach is the transfer of risk from the public sector to the private project company. The transfer of responsibility for managing certain risks is one means for the private partner to provide value to the public project sponsor. For example, the Project Development Agreement or Concession Agreement negotiated with the public sponsor typically specifies the pricing terms for the services delivered from the infrastructure asset over the life of the agreement. The private project company is therefore under contract to deliver those services at the negotiated prices, and it is up to the private project company to manage most risks that might otherwise put pressure on that pricing.

Risk Distribution to Public Project Sponsor: Three Delivery Alternatives

A private financing approach should bring relative value to the public sponsor through direct cost savings, time savings and/or risk avoidance. Project financial analysis begins with a comparison of the relative cost of service over the life of the infrastructure project using a public funding versus private financing approach. The framework for comparing the cost of service resulting from the two approaches requires a full accounting of all associated costs- including capital costs, and costs associated with managing retained risks.

All project risks are quantified by estimating the cost of a risk event and combining that with the probability of the risk event’s occurrence. When all risk events for a project are aggregated and assigned to either the private or public sector through the Project Development Agreement or Concession Agreement, the value to the public project sponsor can be assessed.

To develop successful P3s, MWH Infrastructure Development, Inc. employs the effective and tested MWH Global approach to risk assessment and management. A thorough evaluation of project risks and their cost implications is completed and a detailed risk register is developed. The risk register demonstrates to both the project sponsor and the private parties, how risk can be managed, mitigated and transferred through the project delivery structure. With those insights, MWH IDI utilizes an analytical tool that evaluates, on a net present value basis, the estimated value of the transference of risk between a traditional government procurement project and a public-private partnership over the full life of the proposed project. The key consideration is the cost of service over the life the project – how much will the public project sponsor pay for the services delivered by an infrastructure asset for the full term of the contract.