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Risk Management in Public-Private Partnerships TRB 88 th Annual Meeting

Risk Management in Public-Private Partnerships TRB 88 th Annual Meeting. January 14, 2009 Thomas W. Pelnik III, P.E. Director, Innovative Project Delivery Division. Efficient 3P Risk Allocation. Allocate to party in best position to manage the risk

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Risk Management in Public-Private Partnerships TRB 88 th Annual Meeting

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  1. Risk Management in Public-Private PartnershipsTRB 88th Annual Meeting January 14, 2009 Thomas W. Pelnik III, P.E. Director, Innovative Project Delivery Division

  2. Efficient 3P Risk Allocation • Allocate to party in best position to manage the risk • If neither better situated to manage risk, share it • Perform project risk assessment before procurement • Rate project risks according to likelihood and severity • (Aka apple pie risk allocation)

  3. Efficient 3P Risk Allocation • Why might an Owner elect to use 3P? • $ No public funds to build it? • $ More efficient use of funds for developer to finance it? • Privatization / outsourcing initiative • Availability payments • $ Source of revenue? • New revenue source • Leverage limited public funds • $ Desire for greater cost and schedule certainty?

  4. Virginia PPTA • Guiding Public Policies: • Private entities may develop and/or operate transportation facilities in more timely, more efficient, or less costly manner • Encourage investment by private entities in such facilities – Concept of Concession/Toll Revenues • Provide public and private entities “the greatest possible flexibility in contracting with each other” for the provision of the public services under the Act

  5. Efficient 3P Risk Allocation • Allocate to party in best position to manage the risk • If neither better situated to manage risk, share it • Perform project risk assessment before procurement • Rate project risks according to likelihood and severity • More often allocated to developer compared to other contracting structures due to developer’s 1) strong project control, 2) ability to spread risk over time, 3) equity cushion, and • Owner’s desire to fix its costs

  6. Efficient 3P Risk Allocation • Reduce likelihood and/or magnitude of risk before procurement through pre-development work, data generation/gathering, and due diligence • Compare cost of: • Risk retention vs. • Developer contingency to take risk transfer • Assess strength of competition • Assess appetite for risk transfers • Last, allocate risk

  7. Real World 3P Risk Allocation • What happens when reality rears its head? • Project specific issues dictate risk allocation • Project need / urgency • Policy objectives • Availability of funds • Of course, we can always rely on “self-insurance” • … don’t all public agencies have that?

  8. Key Risk Issues • Procurement / Political Risks • Revenue Risks • Regulatory Risks • Construction Risks • O&M Risks

  9. Key Risk Issues • Procurement / Political Risks • Need for legislative approval • Change in political will in course of procurement • Fear of loss of public control • Fear of excessive profit • Fear of low quality or safety • WILL A CONTRACT BE AWARDED? • Risk assessment and mitigation • Sustained public support for project • Assess strength of public opposition • Public relations and media effort • Educate legislators • Contractual standards and requirements for quality, performance, oversight • Contract controls on projects via revenue sharing or limits on return on equity

  10. Key Risk Issues • Revenue Risks • Macro-Economic Risks • Concessionaire takes all these risks • Inflation, recession, local and regional growth, travel demand influences, capital market conditions, technology change • Competing Policy or Competing Facility Risks • What happens if agency policy promotes HOV use to the detriment of revenue? • Is it in the public interest to provide a monopoly? Should the state have unfettered rights to develop any new facility? • What is the realistic opportunity for expansion within existing corridors?

  11. Key Risk Issues • Regulatory Risks - Environmental Risks • NEPA • Concessionaires will not take NEPA risk • Lenders typically will not fund if NEPA litigation is pending • Possible to close before limitations period expires, but only with agency backstop • Major environmental permits - several approaches: • All in hand before bids • Developer responsible; schedule relief for regulatory delay • Developer responsible; cost and schedule relief if permit conditions more onerous than an assumed baseline • Agency responsible; cost and schedule relief for delay or more onerous conditions

  12. Key Risk Issues • Construction • Non-compensable v compensable events • Force Majeure concept does not exist on normal VDOT project • Agency “self insurance” does not exist • Differing subsurface conditions? • Pre-existing hazardous materials • Owner changes to scope • Added work • Different requirements • Owner caused delays in performance of its obligations • Discriminatory changes in state law [very narrowly defined] • How does an agency account for such issues when it has no funds to address them?

  13. Key Risk Issues • Operations and Maintenance • Non-compensable v compensable delays • Force Majeure concept does not exist on normal VDOT project • Agency “self insurance” does not exist • In the context of a long term agreement, concessionaire must accept changes in technology, practices, and standard of care [as applied to other similar facilities] • Pre-existing hazardous materials no longer an issue • Owner changes to scope • Added work • Different requirements no longer a change • Owner caused delays • Discriminatory changes in state law [very narrowly defined]

  14. Key Risk Issues • Final Observations • Concession risk allocations and management are unique in many respects • Full range of revenue and cost risk allocations leads to complex, detailed documents • Long concession term as a going concern with equity investment and rates of return supports broader private risk assumption • Owner may obtain an improvement not otherwise affordable with public funds, with relatively definable risks/investment • Concessionaire must make its business decision whether to pursue the work

  15. US 3Ps – What’s next? • Multi-modal focus • Efficient procurement and delivery process • Value for money • Multiple agencies

  16. US 3Ps – What’s next? • Multi-modal focus • Comprehensive system operations • Manage congestion • Transit and HOV incentives? • Time of day speed limits? • Local or long trip focus? • Freight corridors?

  17. US 3Ps – What’s next? • Efficient procurement and delivery process • Sophisticated owners • Few revenue positive projects • Blended funding sources • DBF • FOM • DBFOM • Availability payments • Shadow tolls

  18. US 3Ps – What’s next? • Value for money • Public sector comparator • Performance standards • Lane availability • Maintenance standards • Congestion management • Safe operations

  19. US 3Ps – What’s next? • Multiple agencies • Federal, state, regional, local • Large projects of regional or national significance • Local improvements or critical links • Dedicated, needs based funding for O&M

  20. Questions? • For Additional Information • VDOT Website: • http://www.virginiadot.org/business/bu-ipd.asp • dusty.holcombe@vdot.virginia.gov • thomas.pelnik@vdot.virginia.gov

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