The Context of Risk

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The Australian and New Zealand Standard on Risk Management starts the risk analysis process with an instruction to establish the context.  Most of us start at listing the risks and the mitigants.  The standard is right.

m5 motorway toll risk in context brian mcglynn malpineInitially it seems the risks in an infrastructure PPP seem clear, particularly if the project requires extensive construction to a tight time frame. Everyone in the construction organisation, everyone in the SPV and everyone in the government, not to mention the press and the local community, focus on the construction risks.  Will the design be completed in time to make the procurement? Will the delivery of components from overseas meet the shipping schedule? Will the weather hold off at the critical time for works to be completed? Will Industrial Relations be calm or torrid?  All of these are valid questions but they are only relevant to the party taking the construction risk.  Of course, it is good to be informed as to the progress of these important issues so that other parts of the project can be adjusted to meet any changes, but these risks are all identified and allocated by the documents and they should stay where they lie.

Toll Plaza from air distant portraitThat is why the advice of the ANZ Risk Standard is so important to accept.  If you are representing the government as the public party in the PPP and a construction contractor has accepted time, cost and quality risk under the contract, the true risk questions you should be asking are more along the lines of, Is the contractors balance sheet strong enough to support any likely construction problems? Is the documentation clear on the risk allocation? If the contractor fails to deliver, are my remedies strong enough to allow completion of the facility?

Similarly, the board and management of the SPV which owns the concession should equally be interested in the construction progress, but more interested in the questions relevant to its context. Do we have enough cash to enforce our rights under the contract? Is there any documentation risk in the project structure? Is the quality system working? Will the operator be satisfied with the plant when the contractor hands it over?

This short series of posts on risk will examine some of the issues relating to risk in an Infrastructure PPP, drawing upon the large amount of published information and some of my own observations.  But my first advice is start with the context.