Full feasibility study and PPP due diligence

Risk studies and refined PPP mode

Risk analysis

Many of the PPP project risks should have been identified at the pre-feasibility stage using the Suitability Filter. The feasibility study should expand on this with an assessment of all foreseeable risks associated with the project.

The types of risks that are relevant will depend on the type of project and the sector. The analysts engaged for the feasibility study should assess all possible risks as applicable to the particular project.

For further background information on typical risks associated with PPP infrastructure projects see Module 1.

A recognised risk management technique should be applied (see the Links section for further reading on approaches to risk management). There should then be a provisional allocation of those risks (ie who should pay if the risk event occurs) between the PPP sponsor and the private partner. Final risk allocation will occur at the tendering or contract finalisation stage.

Risk allocation

The risk analysis should include an assessment of which party, public or private, is best able to bear each risk. This risk allocation is important for helping with the design of the particular PPP contractual structure that is best suited to the project.

The party that is best able to bear the risk is the one that is in the best position to reduce the likelihood of the risk occurring and / or minimise the consequences of the risk.

Three risk allocations are possible:

• Retained risk - risks that will be retained by the public Sponsor
• Transferable risk - risks that will be transferred to the private partner
• Shared risk – risks that both parties will bear, as agreed in the contract

The goal should be to reduce total risk in the project as much as possible. This is not necessarily the same as transferring as much risk as possible to the private partner. There will usually be some risks that the pubic Sponsor can manage best and these should be retained. For example, the government is often best able to control certain delays associated with land acquisitions and with gaining permissions and approvals.

The major common risks associated with typical PPP modes in the are shown in the risk matrix below.

Typical risk allocations in the main road sector PPP modes

* In case of financial implications lower than Rs. 1 crore, risk is retained by private sector (Source NHAI model concession agreement)

Refinement of the PPP mode

The general PPP mode will have been identified during the pre-feasibility stage using the Mode Selection tool. Once the more thorough risk analysis and allocation has been carried out in the full feasibility study it will be possible to refine the PPP mode further.

PPP modes are very flexible and a great range of subtle variations is possible. The final form of the PPP arrangement will be determined by the particular roles and responsibilities given to the private partner and those retained by the public sector. This will depend on the objectives and scope of the PPP and on the risk allocation, both of which depend very much on the characteristics of the individual project.

For this reason, there is no formula that can be used to decide the final form of the PPP mode. Each PPP is likely to be slightly different. The refined PPP mode must be decided through careful analysis of the best risk allocation and this must be translated into contract terms (the Concession Agreement) that create the incentives and protections that are most likely to achieve the objectives of the PPP and the project.

For background information on the main PPP modal families see Module 1.

At this stage it should be possible to refine the mode from the pre-feasibility stage. Refinements should include the particular cost responsibilities that would be placed on the private partner and the more detailed understanding of the revenue options and entitlements. This is needed so:

• The intended PPP mode can be reflected in the financial analysis
• The intended mode can be described in sufficient detail in the application for in-principle clearance

It is important to note that there may be a feedback from the financial analysis to the PPP mode refinement. For example, if the financial analysis shows that the intended revenue option does not provide enough financial support the project may need to be reconceived, perhaps with a subsidy component or cost reduction. The PPP mode cannot be finalised until the feasibility and due diligence analysis has been completely carried out.

The mode refinement and the final preparation of the contractual specification would typically be carried out by the Transaction Advisors engaged by the Sponsor.

The Concession Agreement and other project documents will be prepared as part of the procurement phase.