Setting up an adequate institutional framework to manage
risks in PPP projects
Training event on risk management in PPP projects26 May 2008
Twinning Project CZ/2005/IB/FI/04
Mikko AJ RamstedtSenior Project Adviser
Financial Partnerships Unit
Introduction
• Background context for risk management
• Building a sound foundation
• Developing a governance framework
• Stage Gate approach
• Managing public stakeholders
• Working with commercial advisers
Risk in the context of Central / Local Government 1
• Benefit realisation• Project objectives / outcomes = benefits
over costs– Socio-economic improvements
• PPP = Value for Money– Financial benefit
Risk in the context of Central / Local Government 2
• Affordability
• Deliverability
• Market• Response• Reputation
• Stakeholder expectations
• Political environment
Building a sound foundation 1
• Role of the Project Team– Identify, quantify, prioritise and manage risks– Create awareness of risks among
stakeholders– Develop a formal risk management strategy– Source necessary expertise– Install a culture of risk ownership and
individual accountability among team members
Building a sound foundation 2
• Analytical scrutiny: Multi-disciplinary approach– Expertise
• Technical, planning, building control, finance, legal etc
– Accountability• Clear input specification & delegation responsibilities
– Key Risk Stakeholders• Involvement • Management
• Team needs to be supported by appropriate governance arrangements!
Building a Team
Project Manager
Internal TechnicalInternal Finance Internal Legal
Commercial Technical
Commercial Finance Commercial Legal
Planning Technical Services HR
Administrative
Communications
Developing a governance framework 1
• Consider institutional protocols / requirements – who are exposed to project risks?
• Senior reporting / accountability• Financial management
Developing a governance framework 2
• Identify stakeholders – who are able to influence risks?
• Project interface matrix• Direct & indirect stakeholders
Developing a governance framework 3
• Constitute steering arrangements– Effective arrangements involve
• Senior accountable officers– Project Sponsor
• Key stakeholder representatives• Technical specialists
Developing a governance framework 4
• Set up a risk management protocol– Risk register– Risk management strategy– Clarity over individual roles– Delegation of powers and accountability– Risk monitoring / review process
Developing a governance framework 5
• Establish lines/forms of communication
– Reporting requirements• Process• Protocol
Governance Framework
Project Team
Internal Resource Pool
Chief Executive
Senior Responsible Officer
Project Sponsor
Project Manager
Senior Finance
Senior Legal
Senior Technical Services
Senior Communications
Senior Planning
Senior Technical Services
User Reps Union Reps
Steering Group
Stage-Gate approach
Risk management as a continuous process
• Purpose:– Audit projects at key stages– Maintain local accountability– Quality assurance tool– Market reassurance: minimum standards
Stage-Gate approach
• Stages:Outline Business Case
Pre-OJEU notice
Pre-Invitation To Participate in Dialogue
Pre-Invitation to submit Final Tenders
Pre-Preferred Bidder appointment
Pre-Financial Close
Stage-Gate approach
Outline Business Case:
• Scope, VfM, Affordability, Deliverability (statutory powers, resources, governance, experience / advisers, market, consultations, land, planning, transferability of risks) – policy sign off.
Stage-Gate approach
Pre-OJEU notice:
• Market sounding, procurement strategy, PQQ, IM, evaluation criteria, market management strategy, affordability management strategy.
Stage-Gate approach
Pre-Invitation To Participate in Dialogue:
• Market / bidder robustness, specification, contractual documentation (CD protocol, specification, project agreement, payment mechanism).
Most commonly problems arise over unresolved land, planning and site issues (environmental, geo-technical, topographical, archaeological).Lack of clarity over scope.Inconsistency in ITPD documentation (typically service spec and Room Data Sheets).
Stage-Gate approach
Pre-Invitation to submit Final Tenders:
• Pricing strategy, design, land and planning development, lender due diligence, authority consents & sign offs, timetable for FC, construction management, stakeholder consultation, affordability, VfM check, calibration of payment mechanism, contract derogations.
Most commonly problems arise over affordability on receipt of bids.Commonly pressure from political climate and original timetable can suggest illogical decisions.Unresolved commercial matters can only lead to upward price movement.
Stage-Gate approach
Pre-Preferred Bidder appointment:
• Provisional sums, O/S risks / exposure, land assembly, enabling works.
PB appointment letter must be as comprehensive as possible.Affordability problems commonly arise due to programme slippage, scope change and unresolved commercial issues.
Stage-Gate approach
Pre-Financial Close:
• Contract management & governance, stakeholder liaison, staff transfers, decant strategy, change mechanism, snagging management, appointment of independent certifier.
Continuity and understanding of authority obligations.
Stage-Gate approach
Process - at each review:1. Submission2. Clarifications & Independent review against
set criteria 3. Independent recommendations
• Essential vs. desirable
4. Response / action to recommendations5. Central Government review of actions taken
• No action –> HOLD / STOP• Positive action –> GO
Managing public Stakeholders 1
• Includes for example authorities responsible for planning, transport, environmental, health & safety, fire, building control etc, and statutory consultees (Audit Scotland, Scottish National Heritage, Historic Scotland, SEPA etc).
• Each body will have a defined remit and powers that project sponsors will need to satisfy.
Managing public Stakeholders 2
• Project team will need to agree: what information is needed, when, in what format, what is the timetable for approval, and who should be involved.
• Each stakeholder should develop and publish standard approval criteria and engagement protocol.
Managing public Stakeholders 3
Managing risks through a communication & consultation strategy
– Creates clarity & consistency of message– Maximises impact– Identifies appropriate channels of
communication
Managing public Stakeholders 4
Communication & consultation strategy
• Needs to cover:– project development – procurement process– construction phase– operational phase
• Should be signed off by Steering Group!
Managing public Stakeholders 5
• Managing stakeholder expectations - Defining key stake-holders– Procuring Authority - - - > Users– Policy
• Transport, Justice, Education, Health, etc• PFI/PPP policy• Procurement policy• MoF
Managing public Stakeholders 6
• Risk mitigation through involvement– What are the key public sector controlled
risks?• Risk identification
– Who controls the key risks?• Risk allocation
– How to mitigate against these risks?• Involvement
Office of the Rail Regulator
Network RailScot Rail Franchise
Scottish Borders Council
Midlothian Council
City of Edinburgh Council
Passenger Focus Transport Scotland
Waverley Transport
Partnership
Scottish Government
Working with commercial advisers
• Benefits:
– Necessary source of expertise– Wider access to critical information– Developing an ‘Intelligent Client’
Working with commercial advisers
• Risks:
– Project ownership– Knowledge transfer– Accountability– Authority– Affordability
Summary
• Project governance arrangements need to be able to support efficient day-to-day management of risks.
• A standardised review process helps to create risk awareness and provide assurance over risk management and mitigation across projects.
• Fostering ownership, accountability and involvement are key to good project governance and should also guide engagement with external advisers.
