Traffic revenue risk allocation
A closer look at the difficult task of forecasting traffic demand for transport infrastructures: a crucial aspect for the arrangement preparation of transport PPPs
Guidance 1European Commission (2003)
Guidelines for Successful Public-Private Partnerships
This DG-Regio publication contains a brief description of the main sources of risk in a PPP project and its financial implications
Guidance 2Greek PPP unit (2006)
Guide for the Implementation of Public-Private Partnerships in Greece
Provides a summary of the minimum content of a PPP contract
Guidance 3Hong Kong SAR Gov. (2008)
An Introductory Guide to Public Private Partnerships
Presents an outline of heads of terms for a generic PPP contract
Guidance 4Infrastructure Australia (2011)
National Public Private Partnership Guidelines
Volume 2: Practitioners’ Guide
This guideline includes a discussion on risk allocation and gives an example of a generic PPP risk table
All aspects of the PPP arrangement (e.g. responsibilities, risk allocation, payment mechanism) need to be developed in greater detail, with the ultimate goal of producing the draft PPP contract. It is advisable to deal with this in sub-steps rather than try to draft a full PPP contract right away as this simplifies the internal review process. For example, it is better to focus the initial internal discussion and approval on the broad commercial aspects of project design rather than on detailed legal terms.
The first step might be to prepare a document outlining the principal commercial terms (“heads of terms”). Once the heads of terms have been internally approved, the Authority should progressively develop and refine the different topics. Guidance 3 Certain aspects (e.g. payment mechanism) might first require the advisers to prepare discussion notes presenting and assessing various alternatives.
The risk allocation of the PPP arrangement will be further developed with the help of advisers and the results checked against prevailing market conditions. Preliminary risk matrices or registers will have already been used in the feasibility phase. They will be further refined in this phase. Guidance 4
The assessment of demand risks is essential in PPP projects (see an example in Traffic revenue risk allocation). The allocation of demand risk is done through the payment mechanism in the PPP contract, which may seek to transfer some, all or none of the demand risk to the private sector (see Payment mechanism for more information).
The financial model of the expected PPP (sometimes called a “shadow bid” model - note that this model is not the same financial model that a bidder will prepare and submit with its proposal) is prepared initially by the Authority and its advisers for use in the feasibility analysis. In this phase, the shadow bid model should be further developed and refined and it should be used to examine alternative risk allocations and payment mechanisms.