Risk Pricing Strategies for Public-Private Partnership Projects


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A Build Operate Transfer BOT Project is typically used to develop a discrete asset rather than a whole network and is generally entirely new or greenfield in nature although refurbishment may be involved. In common law countries a number of projects are called concessions, such as toll road projects, which are new build and have a number of similarities to BOTs.

Risk Pricing Strategies for Public-Private Partnership Projects

The private sector designs, builds and operates the assets to meet certain agreed outputs. The documentation for a DBO is typically simpler than a BOT or Concession as there are no financing documents and will typically consist of a turnkey construction contract plus an operating contract, or a section added to the turnkey contract covering operations. The Operator is taking no or minimal financing risk on the capital and will typically be paid a sum for the design-build of the plant, payable in instalments on completion of construction milestones, and then an operating fee for the operating period.

The operator is responsible for the design and the construction as well as operations and so if parts need to be replaced during the operations period prior to its assumed life span the operator is likely to be responsible for replacement. This section does not address the complex array of finance documents typically found in a Concession or BOT Project.


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The chart below shows the contractual structure of a typical BOT Project or Concession, including the lending agreements, the shareholder's agreement between the Project company shareholders and the subcontracts of the operating contract and the construction contract, which will typically be between the Project company and a member of the project company consortium. The payment stream may be in part or completely through tariffs from the general public, rather than from an offtake purchaser.

For more information about finance agreements, visit the Finance section. Search Search. The concessionaire takes risk for the condition of the assets and for investment. A concession may be granted in relation to existing assets, an existing utility, or for extensive rehabilitation and extension of an existing asset although often new build projects are called concessions. A concession is typically for a period of 25 to 30 years i.

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Asset ownership typically rests with the awarding authority and all rights in respect to those assets revert to the awarding authority at the end of the concession. General public is usually the customer and main source of revenue for the concessionaire. Often the concessionaire will be operating the existing assets from the outset of the concession - and so there will be immediate cashflow available to pay concessionaire, set aside for investment, service debt, etc.

Unlike many management contracts, concessions are focused on outputs - i. There is less focus on inputs - i. Some infrastructure services are deemed to be essential, and some are monopolies. Limits will probably be placed on the concessionaire — by law, through the contract or through regulation — on tariff levels. The complexity of public-private partnership project procurement requires an effective process for pricing, managing and appropriate allocation of risks.

The level at which risk is priced and the magnitude of risks transferred to the private sector will have a significant impact on the cost of the PPP deals as well as on the value for money analysis and on the section of the optimum investment options. The construction industry tends to concentrate on the effectiveness of risk management strategies and to some extent ignores the price of risk and its impact on whole life cost of building assets. There is a pressing need for a universal framework for the determination of fair value of risks throughout the PPP procurement processes. Risk Pricing Strategies for Public-Private Partnership Projects addresses the issues of risk pricing and demonstrates the use of a coherent strategy to arrive at a fair risk price.

The focus of the book is on providing risk pricing strategies to maximise return on risk retention and allocation in the procurement of PPP projects.

Module 1: Public-Private Partnership (PPP) Concept, Benefits and Limitations

Transparency, too, helps to build trust with the public. Companies should have a clear plan for addressing, monitoring, and reporting on key public concerns, such as environmental degradation or affordability issues for the poor. In some cases, companies may need to exceed the quality levels called for by the contract to convince the public that negative effects from the project are being minimized.

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Jeffrey Chua. Philipp Gerbert. Rafael Rilo. BCG uses cookies to improve the functionality, performance, and effectiveness of our communications. Detailed information on the use of cookies is provided in our Privacy Policy.


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By continuing to use this site, or by clicking "I agree," you consent to the use of cookies. How should leaders prepare their companies to thrive in a rapidly evolving landscape?

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What will it take to win the '20s? Choose your location to get a site experience tailored for you. Assess Risk Across the Entire Portfolio of Projects A company should not bid on a project simply because it seems attractive. Control Construction Risk Reports of high-profile infrastructure projects that have gone over budget or are facing major delays seem to surface daily. Driving Success in Large-Capex-Project Management A myriad of potential landmines—from the complexity of a project itself, to swings in prices of commodities and other necessary materials, to getting access to key resources—lie in wait for project developers, owners, and contractors of large capital expenditure projects.

Minimize capital expenditure requirements. Creating a cost-focused culture is critical. With a clear understanding of the drivers of cost, the needs and requirements of the end user, and industry best practices, managers can improve efficiencies and optimize project size to benefit from economies of scale. Design to deliver value. Contractors must understand the key drivers of value for their clients, such as minimizing upfront investment and long-term operating costs.

With that in mind, engineering, procurement, and construction EPC companies and EPC management companies can tailor their plans to meet objectives at the lowest cost possible. Apply vigorous risk management. As projects grow larger and more complex, establishing a process for managing risk becomes imperative. This includes defining acceptable levels of risk and outlining plans for minimizing risk whenever possible. Develop a program for efficient procurement. Poor procurement practices can have a damaging ripple effect on a project, driving up budgets and creating costly delays.

To optimize procurement functions, companies must embed a number of policies into their operations, such as bundling purchases and obtaining materials from low-cost sources around the world. Optimize contracting strategy. Developers should also have a disciplined process for selecting contractors, so that they can zero in on what truly differentiates the various bidders. Secure scarce resources and local content.

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Sometimes other ongoing projects in an area may compete for skilled labor and natural resources. Companies should determine the resources they will need and proactively plan for obtaining them in a tight market. Ensure excellence in the construction phase. Companies should develop highly efficient systems in manufacturing by adopting lean-process planning and working to eliminate defects.

Their efforts should include breaking the construction plan into discrete pieces so that each can be designed to ensure speed and minimize bottlenecks. Set up a project management office. A dedicated project management office PMO can act as the central hub for a complex project, overseeing everything from human resources needs to troubleshooting.

A well-functioning PMO can go a long way toward preventing delays and cost overruns. Manage Operations and Financial Risks Once operational, a PPP must be run with the same rigor and discipline used to run any large business. Shape Public Perception Infrastructure PPPs are more vulnerable to public backlash than any other type of business partnership.

Risk Pricing Strategies for Public-Private Partnership Projects
Risk Pricing Strategies for Public-Private Partnership Projects
Risk Pricing Strategies for Public-Private Partnership Projects
Risk Pricing Strategies for Public-Private Partnership Projects
Risk Pricing Strategies for Public-Private Partnership Projects

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