PPP Construction Risk: International Evidence from the Roads Sector
R Bain, ITS, University of Leeds, UK
This paper will analyse the risk involved with various project types
Is PPP Construction A Success?
1. In terms of successfully delivering large infrastructure projects, PPPs are reported to be a significant improvement over traditional approaches to public-sector procurement.
a. The size of this improvement remains, however, dependent on a number of critical prerequisites being in place (these prerequisites are identified in our research report)
b. Absent these prerequisites, the performance differential between PPPs and conventional approaches is reported to narrow considerably.
Is the Construction of Some Project Types Less Risky than Others?
2. Conventional wisdom suggests that the construction of some types of project is inherently less risky than others. This is not supported by our research findings.
a. Those surveyed suggested a weak ? if any ? correlation between construction risk and project type.
b. Instead, survey respondents identified specific characteristics of a construction mandate that could expose investors to construction risk (these characteristics are identified in our research report).
c. These characteristics cut across many different types of PPP project.
Where Do the Main Construction Risks Lie with PPPs?
3. The most frequently reported cause of PPP construction ?distress? (schedule, specification or budget problems) is the public sector itself.
a. Problems were identified as arising from inexperience, lack of commitment, lack of engagement, bureaucracy, interference and associated scope changes and enforced delays
b. It was reported that ?partnership? is not always the spirit with which the public sector enters into the long-term, collaborative contracting arrangements associated with PPPs.
c. Other major causes of distress included delays with permits and approvals, unforeseen ground conditions, and aggressively tight construction budgets.
How Can Investors Use These Research Results?
4. Based on the survey responses, Standard & Poor?s has developed a Construction Risk Index ? an analytical tool that can be used to identify where PPP projects have previously been exposed to construction risk. Comparison of these ?known? risks with the specific mitigants structured into particular PPP transactions helps to assess credit quality as it reveals areas of potential, residual construction risk exposure for lenders.
The construction phase is often the most risky phase of a PPP project?s lifecycle.
With little published evidence to help investors gauge the construction risks associated with PPPs, Standard & Poor?s launched a global research initiative in late 2006 to address this information deficit.
We received 161 completed surveys (a response rate of over 50% of PPP market participants who registered an interest in our construction risk research).
Survey responses came from the wide range of PPP participants: bankers, construction contractors, procuring agencies, technical and financial advisors, insurers and project companies themselves.
Survey responses were submitted from market participants in 22 different countries.
With a reported average of 6-7 years exposure to PPPs, in aggregate those surveyed reflect nearly 1,000 years of construction risk experience.
Association for European Transport