A guidebook on public-private partnership in infrastructure

B. RISK ANALYSIS AND MANAGEMENT 
Risks are inherent in all PPP projects as in any other infrastructure projects. 
They arise due to uncertain future outcomes which may have direct effect on the 
provision of services by the project, and/or the commercial viability of the project. 
The risk allocation to parties in contract and the management of risks are, therefore, 
at the heart of a PPP design. This is also an important element in establishing the 
business case for a PPP project. 
The risk analysis, allocation and management involve the following activities: 
• Identification of all possible risks and assessing their likelihood; 
• Examining the likely effects of the risks in quantitative and qualitative 
terms; 
• Consideration of suitable mitigation measures that may be available; and
• Allocation of risks to parties. 
Identification of all possible risks 
A good feasibility study provides the basis for identification of risks in a project 
and assessment of their chances of occurrence. The main categories of risks in a 
project may include: 
• Construction and completion risks (delays in construction or cost 
overruns); 
• Technology risk (new and untried technology, whose performance cannot 
be checked against existing references); 
• Sponsor risk (ability of private sponsor(s) to deliver the project); 
• Environmental risk (environmental constraints in construction and 
operation);
• Commercial risk (lower demand and/or revenues than the ones projected); 
• Operating risk (inefficiency in operation leading to higher operating cost); 
• Financial risks (change in interest and currency exchange rates, and tax 
laws); 
• Legal risk (change in legal regime); 

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A Guidebook on Public-Private Partnership in Infrastructure 
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• Regulatory risk (change in regulatory regimes); 

• Political risk (change in government policy or action that affects the 
business case of the project); and 
• Force majeure (risks due to unpredictable natural and man-made events 
such as earthquake, flood, civil war, etc.). 
All such risks may also have many sub-categories. A risk matrix is a useful 
tool in risk management. The matrix can be developed showing all the identified 
major categories of risks together with their sub-categories and chances of 
occurrence over the proposed contract tenure of the project. An example of a 
simplified risk matrix is shown in table 3.