44 | Public-Private Partnerships in Urban Bus Systems
• Best able to lower and manage the impact of the risk on project outcomes, by assessing and anticipating it and, if needed, responding to it • Least vulnerable to the risk’s occurrence. Planners should be wary of suboptimal risk allocation strategies, such as transferring all risks to the private sector or keeping too many under public sector management.1 While allocating all risks to the private sector is a simple and clear strategy, it leads to suboptimal project designs; and projects so designed often fail (Metrocali in Colombia and Ecovía in Mexico) or require significant resources for their restructuring (Transantiago in Santiago, Chile). In other instances, planners assume that the private sector cannot manage or mitigate certain risks and allocate to it project components with little to no risk transfer. Structures that leave significant risk with the public sector can reach financial closure, as shown by the case of SYTRAL in Lyon, France, but may also struggle and fail, as illustrated by the Metrobús-Q in Quito, Ecuador. This framework proposes allocating risk based on a careful consideration of the objectives and restrictions of all stakeholders (previously defined in the process of setting objectives, as outlined in chapter 2). In this sense, the assigning of roles, responsibilities, and functions in the project’s conceptual structure must ensure that the exact services required are consistent with each stakeholder’s objectives and restrictions and can be delivered at (a) a level of quality that meets or exceeds envisaged standards and (b) a cost that is affordable to both users and the government. Risk management strategies include changing the allocation of project functions. Approaching risk allocation from the point of view of project functions places the focus on delivering services rather than on maximizing risk transfer. In addition, allocating functions to the party best able to deliver them mitigates risk. Some project functions complement one another, creating synergies that support risk management and mitigation. Thus, policy makers may find it beneficial to allocate several project functions to the same party. For example, assigning both operations and maintenance (O&M) components to the same operator encourages it to use assets so as to reduce maintenance costs and, at the same time, to maintain assets so as to increase operational efficiency.
IDENTIFYING PROJECT RISKS The first step toward structuring a PPP is to compile a list of all the risks associated with a proposed project. This analytical framework recommends a risk matrix for this purpose. A PPP is considered bankable if the combination of risks and expected returns attracts investors and lenders. Risk has several definitions. It can be defined as an uncertain event (an event with a probability of occurrence higher than 0, but lower than 1) whose occurrence would have a negative impact on a key project objective. Risk can also be defined as “the chance of an event occurring which would cause actual project circumstances to differ from those assumed when forecasting project benefits and costs” (Furnell 2000, as cited by Partnerships Victoria 2001). In any case, when assessing bankability, the impact is measured as the effect on future cash flows as well as on a project’s solvency and sustainability. This framework categorizes project risks based on whether they are direct or indirect. Definitions and examples are presented in the following two subsections.
