DR. D. N. S.

KUMAR

Project Risk Management
WHAT IS RISK ?

Something THAT MAY HAPPEN and if it does,
will HAVE ADVERSE impact on a project

Risk Vs Uncertainty
Risk - when the decision maker knows the probability of each and
every state of nature and thus each and every outcome. An
expected value of each alternative action can be determined

Uncertainty - when a decision maker has information that is not
complete and therefore cannot determine the expected value of
each alternative

Types of Project Risks
Stand alone risk -- viewed in isolation
Firm risk -- Contributions of a
project to the risk of the firm
Systematic risk -- Market risk
Approaches to Risk Analysis
Approaches that consider the stand-alone risk of
project (sensitivity-analysis, scenario analysis,
break-even analysis, Hiller mode, simulation
analysis, and decision tree analysis).

Approaches that consider the contextual risk of a
project (corporate risk analysis and market risk
analysis).

Corporate Risk Analysis
A projects corporate risks is its contribution to the
overall risk of the firm. Put differently, it is reflects
the impact of the project on the risk profile of the
firms total cash flows. On a stand-alone basis a
project may be very risky but if its returns are not
highly correlated- or, even better, negatively
correlated-with the returns on the other projects of
the firm, its corporate risk tends to be low.
Sources of Risk
Size of the investment

Reinvestment of cash flows

Variability of cash flows

Life of the project
Risk Analysis
Principal contribution of risk analysis is to focus the
attention on understanding the nature and extent of
the uncertainty associated with some variables used
in a decision making process

Usually understood to use financial measures in
determining the desirability of an investment project

Pre Construction Risks
Construction Contract Penalties

Arbitration Process

Technology Risk

Market Demand Risk

Structural Risk

Opening of a Project Risk
During Construction
Construction Delay

Cost overrun

Zoning and Regulatory Risk

Permitting Risk

Environmental Risk

Title Risk

Contractor Risk


During Construction.contd.,
Design and Engineering Risk
Materials Risk
Labor Risk
Natural Hazard Risk
Political Risk
Litigations
Workmanship Risk
Post Construction
Management Experience
Economic Conditions
Demand Gap
Catastrophic Events
Concession Risks
O&M Risk
Flow of Funds
MANAGEMENT / MITIGATION OF RISK
INVOLVES

Risk identification in the selected domain of
interest
Allocation of risk to various competent parties
Risk quantification
Risk monitoring
Response and control
Comprehensive contractual framework
Adequate insurance coverage
Keeping risk within acceptable limits

RISK CATEGORIES
Risk
Category
Significant Risks
Phase of
Predominance
Statutory and
Regulatory Risks
Right to collect, retain and
appropriate user charge
Right to fix the user charges
Obtaining approvals and
clearances from authorities
Land acquisition/right of way
Project Development
period
Design &
Development Risk
Design defect
Construction difficulties
Project development/
construction period
Completion Risk Cost overrun
Time overrun
Fund Mobilisation
Institutional Arrangement
Construction period
Performance and
Operation Risk
Failure to meet performance
criteria
Operating cost overrun
Operation period
Revenue Risk Changes in user charge
Changes in chargeable volume
Operation period
Contd..
Risk Category Significant Risks
Phase of
Predominance
Finance Risk Interest rates
Change in tax regime
Forex rate fluctuation
Operation period
Force Majeure Risk Acts of God (non political
event) viz. flood,
earthquake etc.

Political event, viz. changes
in law, breach or
cancellation of contract
Throughout the project period
Social Risk Resettlement and
Rehabilitation
Project development/
construction period
Environmental Risk Environmental incidents Construction and Operation
period
Insurable Risk Casualty

Third Party Liability

Workmens compensation
Through the period from project
development, completion and
operation period
RISK CATEGORIES
RISK ANALYSIS
RISK
MANAGEMENT /
MITIGATION
MANAGEMENT / MITIGATION PLAN
Risk Category
/ Description
Risk Mitigation Instrument /
Allocation
Failure to obtain
Approvals and
Clearances from the
concerned
Authorities
CA necessitates prior clearance from the
GOI/GOWB, failure of which will result in
termination of agreement and financial
losses to be borne by the Authority
Instrument:- Concession
Agreement (CA)

Allocation:- The Authority
Delays in Land
Acquisition and
Right of Way
Allotment of physically encumbrance-
free land achieved through prior Social
Assessment studies by identifying the
project affected land and adequate cost
estimates.
Instrument:- Concession
Agreement,
Lease Deed

Allocation:- The
Concessionaire
Delay in Project
Development
activities
The onus of expeditious completion of
the project falls on the Concessionaire
Instrument:- Concession
Agreement

Allocation:- The
Concessionaire
Time over-runs due
to Contractors
default
Being an equity partner, the onus of
early completion of the project lies on
the Concessionaire.
Levy of penalty and liquidated damages
in case of default
Instrument:- Construction
Contract

Allocation The
Concessionaire
Contd
Management / Mitigation Plan
Risk Category /
Description
Risk Mitigation Instrument/
Allocation
Cost overruns Carry out detailed engineering
surveys & investigations during
Project Development Phase

Extension in the Concession period
till the desired rate of return is
achieved
Instrument:-Concession
Agreement

Allocation:-the
Concessionaire
Contractor
Non realisation of
Operation Revenue
because of lower offtake,
user charge leakage and
avoidance
Accurate demand projections in
Project Report

Proper monitoring and reporting
mechanism as well as independent
audits of user charge operations
Instrument:-Concession
Agreement

Allocation:- the
Concessionaire,
O&M Contractor
Force Majeure Political /
Termination Risk
Adequate compensation in case of
imposition of new laws and tax
structure, withdrawal of tax holidays
or restrictions on Forex transfer

Reimbursement of outstanding dues
to the project lenders and a pre-
agreed return to the equity investors
in case of termination because of
policy change by the government
Instrument:-Concession
Agreement

Allocation:-The
Concessionaire
Contd
Management / Mitigation Plan (Contd)
Risk Category /
Description
Risk Mitigation Instrument/ Allocation
Financial Risk due to
drastic change in the
interest and tax rates
Project to be financed
through an optimal mix of
fixed rate and floating rate
instruments
Instrument:- Lenders Agreement


Allocation:- The Concessionaire
Financial Risk Exchange
rate risk
Financing arrangement to
be made to swap the Forex
debt for equivalent Rupee
debt when exposed to the
risk of currency devaluation
Instrument:- Financing Agreements

Allocation:- The Concessionaire
Financial Risk Inflation
Risk
Provision for inflation
adjustment of costs in CA.
The Concessionaire would
bear the inflation risk
accordingly
Instrument:- Concession
Agreement

Allocation:-
the Concessionaire
The attractiveness of a PPP project depends on
the risk perception of the private sector
Risks may be analysed and mitigated using
available technological, human and
organizational resources
If risks can be reasonably allocated and an
effective management and mitigation plan built
into the agreements, then private sector
participation in infrastructure projects can be
ensured.