The complexity of public-private partnership project procurement requires an effective process for pricing, managing and appropriate allocation of risks. The level at which risk is priced and the magnitude of risks transferred to the private sector will have a significant impact on the cost of the PPP deals as well as on the value for money analysis and on the section of the optimum investment options.
The construction industry tends to concentrate on the effectiveness of risk management strategies and to some extent ignores the price of risk and its impact on whole life cost of building assets. There is a pressing need for a universal framework for the determination of fair value of risks throughout the PPP procurement processes.
Risk Pricing Strategies for Public-Private Partnership Projects addresses the issues of risk pricing and demonstrates the use of a coherent strategy to arrive at a fair risk price. The focus of the book is on providing risk pricing strategies to maximise return on risk retention and allocation in the procurement of PPP projects. With its up-to-date coverage of the latest developments in risk pricing and comprehensive treatment of the methodologies involved in designing and building risk pricing strategies, the book offers a simple model for pricing risks.
The book follows a thematic structure: PPP processes map; Risk, uncertainty and bias; Risk pricing management strategies; Risk pricing measurement and modelling; Risk pricing at each of the project life cycle stages – and deals with all the important risk pricing issues, using relevant real-world situations through case study examples. It explains how the theory and strategies of risk pricing can be successfully applied to real PPP projects and reflects the broad understanding required by today’s project risk analysts, in their new and important role in PPP contract management.
Table of Contents
Preface ix
Chapter 1 Mapping of the PPP’s Processes and Concepts 1
1.1 Introduction 1
1.2 Rationale for PPPs 2
1.3 key stages in the PPP procurement process 7
1.4 Financing PPP projects 12
1.5 Rationale for value for money and risk transfer in PPPs 16
1.6 PPP project structure 19
1.7 Payment mechanisms in PPPs 25
1.8 PPP emerging issues 28
1.9 Summary 29
References 30
Chapter 2 Uncertainty in Pricing Risk 31
2.1 Introduction 31
2.2 Concepts of Risk and uncertainty 31
2.3 Relationship between risk and uncertainty 44
2.4 Attitudes to risk and uncertainty 46
2.5 Variability and uncertainty 48
2.6 Quantifying uncertainties in risk pricing 50
2.7 Taxonomies of uncertainty 53
2.8 Pricing risk under uncertainty 54
2.9 Summary 55
References 55
Chapter 3 Bias in Risk Pricing 59
3.1 Introduction 59
3.2 Risk bias theories 60
3.3 Sources of bias 66
3.4 Managing bias 81
3.5 Summary 87
References 87
Chapter 4 Management Strategies for Risk Pricing 91
4.1 Introduction 91
4.2 Principles of risk pricing strategies 92
4.3 Risk pricing management strategies 95
4.4 Value gain and loss from risk retention 97
4.5 Risk retention analysis 100
4.6 Resources capability for risk control 103
4.7 Summary 105
References 106
Chapter 5 Framework for Pricing PPP Risks 107
5.1 Introduction 107
5.2 Framework for pricing construction risks 108
5.3 Strategies for risk costing 114
5.4 Risk pricing in PPP transaction 119
5.5 The choice of the discount rate in risk costing 129
5.6 Summary 135
References 136
Chapter 6 Risk Measurement and Modelling 139
6.1 Introduction 139
6.2 Quantifying risks 140
6.3 Probability distributions for risk costing quantification 146
6.4 Risk analysis Methods 153
6.5 Selecting a risk analysis technique 162
6.6 How to build a risk pricing BN model 164
6.7 Building risk price models using Monte Carlo simulation 169
6.8 Summary 172
References 172
Chapter 7 Risk Allocation Networks in PPP Contracts 175
7.1 Introduction 175
7.2 Risk systems in PPP contracts 178
7.3 Modelling the parameters of the risk allocation network 180
7.4 The structure of risk allocation networks in PPP contracts 181
7.5 Modelling the structure of the risk allocation network 185
7.6 The characteristics of a typical PPP risk allocation network 186
7.7 Key observations 191
7.8 Summary 192
References 193
Chapter 8 Pricing Development and Construction Risks 195
8.1 Introduction 195
8.2 Overview of development and construction risks 196
8.3 Strategies for mitigating and managing development and construction risks 209
8.4 Pricing development and construction risks 214
8.5 Summary 218
References 219
Chapter 9 Pricing Operational Risks 221
9.1 Introduction 221
9.2 Overview of operational risks 221
9.3 Strategies for mitigating and managing operational risks 228
9.4 Pricing operational risks 233
9.5 Operational risks pricing example 235
9.6 Summary 241
References 241
Chapter 10 Financial Risk Assessment in PPP Projects 243
10.1 Introduction 243
10.2 Emergence of risks in project finance 244
10.3 Risk network concepts 246
10.4 Project finance cash Flow risk network 247
10.5 Assessment results 256
10.6 Summary 260
10.7 Acknowledgements 261
References 261
Index 263
