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© Chair Construction Economics - Bauhaus-Universität Weimar 2008 1
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Life cycle oriented risk management for PPP-projects in public real estate
June 26th, Workshop Session 5K - PPPK. Leidel, Bauhaus-Universität Weimar
Royal Institute of Technology (KTH), Stockholm
EUROPEAN REAL ESTATE SOCIETY Conferences 2009STOCKHOLM, JUNE 24-27TH 2009
© Chair Construction Economics - Bauhaus-Universität Weimar 2008 2
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Introduction
Risk management is
‘the culture, process and structure, which come together to optimise the management of potential
opportunities and adverse effects’
part of the definition of risk management by the Australian/New Zealand Risk Management Standard (AS/NZS 4360:2004)
© Chair Construction Economics - Bauhaus-Universität Weimar 2008 3
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Outline
Need for action1
Areas of investigation I Research methodology2
Overall concept and next steps 3
Discussion
© Chair Construction Economics - Bauhaus-Universität Weimar 2008 4
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Risk management in PPP projects:
Complexity of life cycle oriented projects
Lack of historical data and information
Insufficient risk awareness of project stakeholders
Lack of common understanding of risk
High uncertainty in application of techniques and methods
Low transparency of decision criteria and the decision-making process
Lack of consistency in dealing with risk
Need for action - status quo
© Chair Construction Economics - Bauhaus-Universität Weimar 2008 5
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
PPP Risk management
Projectlife cycle
Project stakeholders
Risk management process
Stage-specific risk profile at different project stages:Amount of risk expenseCapability to influence riskConsistency of revenueUpside potential
Project stakeholders differ in their:ObjectivesFunctions throughout the project lifecycleRisk perceptionRisk willingness to take risksRisk capability to bear risk
Sub-processes differ in: Organisational and operational requirements The extend of available information and data Applicability of reasonable methods and
techniques
Areas of investigation
© Chair Construction Economics - Bauhaus-Universität Weimar 2008 6
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
► Literature research Few available literature/previous studies in Germany, e.g.
Elbing, Risikomanagement für PPP-Projekte, 2006
Pfnür , Risiken immobilienwirtschaftlicher PPPs aus Sicht der beteiligten Akteure, BPPP, 2006
Pfnür/ Schetter/ Schöbener, Risikomanagement öffentlicher Infrastrukturinvestitionen in Public Private Partnerships – wissenschaftliches Gutachten im Auftrag der Initiative Finanzstandort Deutschland, 2008
► Qualitative content analysis to identify risk
Research methodology
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Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
► Empirical study: qualitative and quantitative survey 12 expert interviews
Questionnaire for all principal PPP stakeholders in Germany
577 respondents invited to participate
53 completed the survey
response rate: 9%
Research methodology
Stakeholders’ specific structure and process of risk management
Application of methods willingness to bear relevant
risk risk management strategies
© Chair Construction Economics - Bauhaus-Universität Weimar 2008 8
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Areas of investigation – stakeholder perspectives
Public principal
Debt funder
(General) ContractorDesigner/ Consultant
Project company/ SPV Equity provider
Project agreement/PPP contract
Loanagreement
Construction contract
Shareholder agreement
Service contract
Operation/ FM contract
Private sector
Public sector
Operator
Sponsors
Institutional investors
Lending banks
Development finance institution
► Who are the principal stakeholders?
© Chair Construction Economics - Bauhaus-Universität Weimar 2008 9
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Areas of investigation – stakeholder perspectives
Stakeholder Objectives ContributionsPublic principal
Efficiency gain Leveraging of government budget Acceleration of the project Better service quality Compliance with requirement and
regulations
Concession/ licences Service fee
Equity providerSponsors Adequate rate of return
Strategic potential (e.g. extension of business, diversification of project-or risk portfolio)
Equity or mezzanine capital Project development,
management and professional competence and experience
Investors Maximising of return Diversification
Private equity Quality control Financial competence
Debt funderLending banks Loan repayment
Careful financial evaluation Debt Monitoring of quality Financial competence
Development finance institutions
Loan repayment Support of development goals
Contractor/ facility manager and operator (incl. design)Construction/ general contractor
Sufficient margin
Required construction work Turnkey fixed-price contract
Facility manager and operator
Required service Fixed-price contract
© Chair Construction Economics - Bauhaus-Universität Weimar 2008 10
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Preparation and Conception
Tendering and Awarding
Construction
Operation
Exploitation
Capability of influencing source
and effect of risk
Amount of risk expenses
Consistency of revenue Upside potential
low I medium I high
Specific risk profile per project stage
low I medium I high
low I medium I high
low I medium I high
low I medium I high
Areas of investigation – project life cycle
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Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Risk before risk management
Identifiedrisk
Assessedrisk
Risk afterrisk management
Riskidentification
Risk analysis and assessment
Riskallocation
Risks remaining with public principal
Risks transferred to private partner
Riskmitigation
Risk control and monitoring
Discover and describe all the risks relevant to the project
Quantitative determinationof the degree of likelihood and the possible consequences
Assigning the responsibility of risks to the party best able to manage it
Risk response planning;development andimplementation ofrisk strategies
Prevention
Transfer
Reduction
Acceptance
e.g. risk matrix
negatotiation
e.g. risk checklists
Ongoing review and control of developments and changes
Monitoring of theRisk management system
Risks not identified
Documentation, control, monitoring
Global risks Project specific risks
Areas of investigation – risk management process
© Chair Construction Economics - Bauhaus-Universität Weimar 2008 12
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Overall concept for PPP risk management
Risk identification
Risk analysis &assessment
Riskallocation
Risk control &monitoring
Processes of risk managem
ent
Princip
al sta
keholders
Life cycle of a PPP project
Construction Exploitation OperationTendering & Awarding
Preparation & Conception
© Chair Construction Economics - Bauhaus-Universität Weimar 2008 13
Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
► Further investigations
Development of a risk management process definition of sub-processes, e.g. detailed risk allocation process
Assignment of responsibilities
Identification and describing reasonable techniques and methods to deal with risks
Allocation of risk strategies available to risks and stakeholders
Increasing risk awareness among the participants
Next steps
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Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Thank you for your attention!
Discussion
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Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
► Empirical study
Research methodology
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Lifecycle-oriented Risk Management for PPP-Projects in Public Real Estate Bauhaus-Universität Weimar
Rank
Risks’ importance based on the perception of
Public principal Debt funder Equity provider Contractor-Operator
1 Demand risks Risk of Insolvency of the contractors
Technical implementation risks Design risks
2 Tendering and awarding risks
Risk of the insolvency of the principal
Insolvency risks of the contractors Management risks
3 Site risks Income risks Management risks Approval risks
4 Force majeure Demand risks Financial risks Tendering and awarding risks
5 Risks of changes in law Financing risks Operating risks Contract risks