Top Risks in Public-Private Partnerships: A Checklist
- David Bell
- Jan 7
- 11 min read
Public-Private Partnerships (PPPs) can deliver public services or infrastructure by leveraging private sector funding and expertise. However, managing risks in these long-term agreements is challenging. Poor risk management can lead to financial losses, delays, or even project failures. Here's what you need to know:
Risk Mismanagement Examples: Governments may face unexpected financial burdens, as seen in India (2022) and Ontario (2014), where poor planning led to billions in extra costs.
Key Risk Categories:
Site Risks: Issues with land acquisition, permits, or geological conditions.
Construction Risks: Delays, cost overruns, or design flaws.
Operational Risks: Service quality issues or revenue shortfalls.
Regulatory Risks: Political interference or changes in laws.
Economic Risks: Inflation, currency fluctuations, or tax changes.
Risk Management Tools: Use a risk register to identify, assess, and mitigate risks. Engage stakeholders early to ensure risks are allocated effectively.
Risk Allocation: Assign risks to the party best equipped to manage them. For example, private partners often handle demand risks in user-pays models, while governments retain political risk.
Effective risk management requires ongoing monitoring, clear contracts, and proactive strategies to prevent disruptions and protect public value.
How to Identify and Categorise Risks in PPPs
The backbone of any successful Public-Private Partnership (PPP) lies in thoroughly identifying and categorising risks before finalising contracts. This process starts with developing a detailed risk register - a comprehensive list of potential risks that could arise during the project [1]. The World Bank defines a risk as "an unpredictable variation in the project's value - from the point of view of some or all stakeholders - arising from a given underlying risk factor" [1].
Given the unique nature of PPP projects - like specific geological challenges for road construction or unusual demand patterns for a hospital - it's essential for implementing agencies to seek advice from specialist consultants. This ensures that no critical risks are missed [1]. Identifying risks early allows project teams to make adjustments, conduct additional studies, and reduce uncertainties, which in turn helps keep bidding costs in check [1]. This early groundwork is vital for creating tools like the risk register, which is central to effective risk management.
Creating a Risk Register
A risk register acts as a living document, tracking risks throughout the project's lifecycle and assigning responsibility for their management [3]. Building a risk register involves four main steps:
Both qualitative and quantitative methods can be used for assessment. Many agencies rely on risk heat maps to categorise risks as low, medium, or high based on their likelihood and impact [1]. This visual tool helps project teams prioritise their focus, directing resources to risks with the highest likelihood and impact. According to the Global Infrastructure Hub, "a more detailed risk matrix can be used to support ongoing decision-making post signature, during construction and operations (as a continuing tool for contract management)" [3].
Before finalising the risk register, it’s crucial to engage with potential lenders, equity investors, and contractors through market soundings. This step helps gauge the private sector's willingness to accept certain risks, ensuring the project remains attractive and financially viable for commercial partners [3].
Grouping Risks by Phase or Function
Once risks are identified, they need to be organised in a way that facilitates effective management. This is typically done either by project phase (design, construction, commissioning, operation, and termination or handback) or by functional area (such as site-related issues, financial risks, regulatory and political factors, demand or commercial risks, and technical considerations) [1][2].
Many agencies use standardised frameworks as a starting point. For example, the GI Hub Risk Allocation Tool provides 18 sector-specific matrices covering areas like economic infrastructure (transport, energy, water) and social infrastructure (schools, hospitals) [3]. These templates can be customised to reflect local laws and the specific characteristics of a project. This ensures a thorough approach while avoiding unnecessary duplication of effort. Grouping risks in this way also lays the foundation for more detailed analysis and management, which will be explored in subsequent steps.
Main Risk Categories in PPPs
When managing Public-Private Partnership (PPP) projects, understanding and categorising risks is essential. The World Bank highlights several key areas where risks tend to cluster, each requiring careful attention and tailored strategies [1]. These categories help shape effective approaches to mitigate risks.
Site Risks
Problems with the project site can disrupt progress even before construction begins. According to the World Bank, site risks involve "issues related to the availability and quality of the project site, such as the cost and timing of acquiring the site, obtaining permits, securing rights of way for infrastructure, geological challenges, and meeting environmental standards." [1]
For linear infrastructure projects like roads, obtaining rights of way often adds complexity and expense. Unforeseen geological conditions can inflate costs, and in brownfield projects, reliance on inaccurate pre-contract data can lead to costly errors. To address these challenges, conducting additional geological surveys before tendering can reduce uncertainties and lower bidding costs [1]. Simplifying performance requirements where possible can also help minimise excessive site-related risks [1].
Design, Construction, and Commissioning Risks
These risks encompass the entire construction phase, including delays, cost overruns, design errors, and failure to meet performance standards. The Global Infrastructure Hub’s PPP Contract Management Tool, based on insights from over 250 projects worldwide, underscores the importance of monitoring financial health and contractor performance. Contractor failures, for instance, can lead to Project Company defaults [6][7].
Take the UK’s Intercity Express Programme as an example. Delays in Network Rail’s electrification work caused cost increases and schedule setbacks for the Project Company [7]. Similarly, Spain’s Segarra Garrigues Irrigation System faced severe delays when lenders withdrew support after the Procuring Authority’s credit rating dropped, forcing contract renegotiations [7]. These examples highlight the importance of proactive management during the construction phase to avoid cascading issues.
Operational and Demand Risks
Once operational, projects face risks tied to service quality, efficiency, and revenue generation. Service interruptions, poor maintenance, or operational inefficiencies can undermine performance standards. Demand risks - where usage falls short of projections - can lead to revenue gaps that threaten financial stability.
For instance, a toll road project in Brazil struggled financially due to lower-than-expected revenue and difficulties in raising additional debt. The Procuring Authority had to intervene by extending the investment timeline and replacing equity investors with partners better suited to secure financing [7]. Effective risk management during operations involves regular performance reviews, site inspections, and clear protocols for addressing potential defaults [7].
"The Procuring Authority should not be caught unaware by a Project Company default as long as it appropriately monitors the performance and financial indicators of the Project Company" [7]
Regulatory and Political Risks
Government actions - whether deliberate or unintentional - can significantly impact a project’s success. These risks include permit renewals, overly strict regulations, breaches of contract, asset expropriation, or political interference [1]. Broader changes, such as shifts in corporate tax laws or currency rules, can also disrupt financial assumptions.
To mitigate these risks, public sector leaders should carry out thorough legal due diligence, include "Change of Law" clauses in contracts, and address sovereign immunity provisions to clarify dispute resolution mechanisms [8]. Proactive measures like these can help safeguard projects against unexpected regulatory or political shifts.
Economic and Financial Risks
Macroeconomic factors such as inflation, interest rate changes, and currency fluctuations can undermine project value and returns. These risks affect both construction costs and operational revenue, making long-term financial planning more difficult. Currency risks are particularly challenging for projects involving international investors or cross-border financing. Additionally, changes in corporate tax rates or rules governing profit repatriation can alter a project’s financial viability [1].
To manage these risks effectively, tools like risk heat maps can help prioritise risks based on their likelihood and potential impact. This allows teams to focus resources on addressing the most critical economic and financial threats [1].
How to Manage and Allocate Risks in PPP Projects
Principles of Risk Allocation
Managing risks effectively in Public-Private Partnership (PPP) projects begins with assigning each risk to the party best equipped to handle it. This means giving responsibility to the group most capable of managing the risk’s likelihood and impact [10][3]. When done correctly, this approach can lower overall project costs by reducing the "risk premiums" that private bidders often include in their pricing [3].
That said, ensuring a project is bankable doesn’t automatically mean it delivers value for money. The Global Infrastructure Hub highlights this issue:
"A project can be bankable, but not deliver value for money because a Contracting Authority is transferring risks to the private sector that could be more efficiently managed by the government" [3]
In practice, the public sector should retain risks that private companies cannot reasonably assess or price, such as those tied to political decisions, land acquisition, or certain force majeure events [4][3].
To refine risk allocation, public authorities should conduct market soundings with lenders, contractors, and investors to understand their risk appetite. This ensures risks are priced appropriately [3]. For practical guidance, the Global Infrastructure Hub offers 18 annotated risk allocation matrices tailored to various project types, including infrastructure sectors like roads, airports, schools, and hospitals [3][9].
Payment Model | Demand Risk Bearer |
User-pays (Concession) | Private Partner – Revenue comes from end-user fees (e.g., tolls). The private partner assumes the risk of lower-than-expected usage [10] |
Government-pays (Availability) | Public Partner – The private partner receives regular payments based on meeting quality standards, regardless of usage levels [10] |
Minimum Revenue Guarantees | Shared – The private partner collects user fees, but the government covers revenue shortfalls below a set threshold [10] |
These principles are relevant across all stages of a project, from initial site selection to the operational phase.
Creating a Risk Management Plan
Beyond risk allocation, a well-constructed risk management plan is essential. This plan typically involves five key steps: identification, assessment, mitigation, allocation, and monitoring [2][3]. Start by building a risk register to log all potential variations in value. Then, use a risk heat map to categorise risks based on their likelihood and impact, focusing on those that are both high-probability and high-impact [2]. This structured process ensures consistency with earlier risk categorisation efforts.
Reducing uncertainty before the tender stage is critical. Conduct detailed geological surveys, environmental assessments, and traffic forecasts to minimise the risks bidders face, which can help lower their pricing premiums [2][5]. Avoid performance requirements that impose excessive risks without delivering meaningful value [2]. Since PPPs often span 15–30 years, it’s wise to include mechanisms for adjusting to unforeseen changes without escalating disputes [10][3].
"A balanced and reasonable risk allocation requires that all stakeholders in a PPP project have the comfort that situations that are beyond their immediate control and that affect contractual performance will be dealt with in a way that allows them to arrive at a mutually acceptable solution." – World Bank [10]
The risk matrix shouldn’t be treated as a static document. Instead, it should evolve from the procurement phase into an active tool for managing risks during construction and operations [3]. Performance security measures, such as bid bonds, completion bonds, and performance guarantees, should also be implemented. However, these measures must be proportional, as overly demanding requirements can drive up costs unnecessarily [5]. Keeping the risk matrix dynamic ensures that risk allocation remains proactive throughout the project’s lifecycle.
Conclusion: A Checklist for Effective Risk Management
Managing risks in Public-Private Partnerships (PPPs) requires a structured and forward-thinking strategy. The checklist shared in this article offers a solid foundation for identifying, categorising, and assigning risks to the party best suited to handle them. As Marie Lam-Frendo, Chief Executive Officer of the Global Infrastructure Hub, aptly puts it:
"The appropriate application of risk allocation principles is what determines whether a PPP project will satisfy the needs of the government, achieve value for money and be financially viable for the private sector" [3].
Your risk register should be treated as a living document, evolving alongside the project. This means revisiting and updating risk assessments regularly to account for new developments - whether they stem from technological advances, economic fluctuations, or unexpected political events. With 527 PFI contracts in England tied to future payments exceeding £100 billion, relying on outdated assessments simply isn’t an option [11].
Successful risk management combines qualitative tools like heat maps with quantitative techniques to focus on risks that are both likely and impactful. Engaging with market soundings and expert advisers can also help address risks unique to specific projects [1][3]. Keep in mind that achieving financial close doesn’t automatically guarantee value for money. In some cases, risks transferred to the private sector might have been more efficiently managed by the government [3].
Finally, monitoring for signs of distress early on is crucial. Timely interventions can help avoid service disruptions, costly legal battles, or unplanned termination payments that could put public finances under pressure [11]. By adhering to this checklist approach, you can better navigate the complexities of PPPs and safeguard public value throughout the duration of the contract.
FAQs
How can governments allocate risks effectively in public-private partnerships (PPPs)?
To manage risks effectively in Public-Private Partnerships (PPPs), governments should assign each risk to the party best suited to handle it. This means evaluating who has the expertise to monitor, manage, and absorb the financial implications of specific risks. Key risks to consider include construction, operational, demand, regulatory, and financial risks. Once identified, governments can use contractual tools like performance guarantees, revenue-sharing agreements, or availability payments to transfer appropriate risks to private partners.
When private financing proves difficult, governments may need to retain certain macroeconomic or sovereign risks. Tools such as guarantees, credit support, or co-financing can help make projects more attractive, while still ensuring that private partners take on the bulk of construction and operational responsibilities. Setting up a dedicated PPP unit can also bring focus and expertise to risk allocation, improving institutional capacity and project outcomes.
To keep projects running smoothly and avoid disputes, regular monitoring is essential. Maintaining a clear risk register and employing strategies like insurance or accepting minor, low-impact risks can also help ensure everything stays on track.
What is the purpose of a risk register in managing risks in public-private partnerships?
A risk register plays a key role in identifying, evaluating, and managing risks within public-private partnerships (PPPs). It serves as an organised record, capturing potential risks, assigning responsibility for handling them, and monitoring ongoing mitigation efforts.
Keeping a well-maintained risk register allows public sector leaders to keep all stakeholders informed about potential issues. This not only supports proactive decision-making but also helps minimise the chance of unforeseen disruptions. Plus, it promotes transparency and trust - both crucial ingredients for a successful PPP.
How can public-private partnerships address unexpected site risks effectively?
Unexpected site risks - like delays in acquiring land, unexpected ground conditions, or costs tied to environmental regulations - can be tackled effectively with proper planning. A good starting point is setting up a risk register. This tool helps identify potential site-related uncertainties (like permit delays or groundwater problems) and assigns responsibility for managing them. Early site investigations, such as geotechnical surveys and environmental assessments, are essential to spot hidden challenges before they escalate.
Distributing risks to the parties best equipped to handle them is another smart move. For instance, geological risks could be passed on to contractors through performance bonds, while politically influenced risks might be better managed by the public sector. To prepare for unforeseen issues, include contingency allowances and establish clear contractual terms - such as clauses addressing unexpected conditions - to manage cost overruns or delays without needing to renegotiate agreements. Keep the risk register updated throughout the project to incorporate new insights as they come to light.
By focusing on thorough planning, early investigation, smart risk distribution, and continuous monitoring, public sector leaders can minimise the effects of unexpected site risks in PPP projects.
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