1. SESSION 3a Tuesday 12– 13.00
Risk Allocation

2. Contents (6) Treatment of Specific Risks
Costs which have already been incurred or are irrecoverably committed should be ignored in an appraisal
Wider economic benefits, such as tax flowbacks to the exchequer should not normally be counted as economic benefits or costs

3. Content (6) Risk Transfer
All projects are subject to uncertainty and risk
At the PPP Business Case stage three levels of risk must be addressed
Strategic Risk
Project Risk
Sensitivity Analysis

4. Contents (6) Strategic Risk
Must be identified as part of the overall analysis of business need
This will enable high level threats to be assessed and responses developed

5. Contents (6) Project Risk
The Business Case should include a draft catalogue or register of identifiable risks associated with the project
Will be developed as the project proceeds to list all the identified project risks
Will contain assessments of likely impact and cost consequences and mitigating strategies

6. Contents (6) Project Risk
Only broad assessments of likely impact of risks and consequences may be possible
Risk assessment needs to be sufficiently detailed to distinguish between options
Risk assessment should outline in broad terms the risk management strategies which will need to be developed

7. Contents (6) Project Risk
Impact of Risk ($)
High indicates that the event will have a significant impact on the project
Medium indicates that the event will impact on the project
Low indicates that the impact on the project will be relatively minor
None indicates that the risk will not impact on the project

8. Contents (6) Project Risk
Probability of Risk (%)
High indicates that the event is highly likely to occur
Medium indicates that the event is likely to occur
Low indicates that the event is not likely to occur

9. Contents (6) Project Risk
Expected Value ($) is the weighted average of dollar value impacts
High
∑High Impact ($) x Probability (%) +
P = low
∑Medium Impact ($) x Probability (%) +
∑ Low Impact ($) x Low Probability (%)
= Expected Value ($)

10. Contents (6) Project Risk
Allocation
Government – Government retains responsibility for managing the risk.
Private Sector – Risk is transferred to the Private Sector. They are responsible for managing the risk.
Shared – Government and Private Sector shares responsibility for managing the risk

11. Contents (6) - Project Risk
Impact ($)
Probability (%)
Expected
Value ($)
Allocation
High
Medium
Low
PPP
Risk 1 / Risk 1 Mitigation
Risk 2 / Risk 2 Mitigation
Risk 3 / Risk 3 Mitigation
Etc.
Traditional

12. Contents (6) Sensitivity Analysis
The appraisal of options will be affected by uncertainty, for example projections of future demand for services
Such uncertainties should be dealt with through sensitivity analysis
I.E. identify main variables and uncertainties, assess potential range of feasible outcomes and build them into the evaluation of options

13. Contents (6) Sensitivity Analysis
In this way the impact of uncertainty on the ranking of options may be tested
The best option will be the most flexible one which continues to deliver the outputs and gives value for money

14. Contents (6) Sensitivity Analysis
Where small variations change the results of the appraisal, the risks are likely to be significant
Risk management action should be focused on the most sensitive factors and assumptions
Any significant differences in the capacity of the short-listed options to respond to risk should be brought out in the Business Case

15. Contents (6) Sensitivity Analysis
Description of assumption to be changed
Base Case
Assumption Change A (e.g. debt/equity ratio)
Assumption Change B (e.g. debt/equity ratio)
VFM
%VFM
Assumption Change 1 (e.g. credit spread)
Assumption change 2 ….
Etc.