Managing Risks for PPP
Risk can be said to be chance of a particular event happening; often a bad one. Every business is bound to have certain risks attached with it. Public Private Partnerships (PPP) is no different. But what makes it different from others is that the private partner is the one who often ends up taking risks.
To understand how to mitigate risks in Public Private Partnership we spoke to Mr. Arun Lakhani, leading PPP expert with the BJP government.
Lakhani says the first step towards an efficient mitigation plan is identifying and classifying the risks involved.
This should be done even before commencing procurement stage. It greatly helps in having a clear picture of where risks can be minimized to the maximum. It also helps the private partners to be ready for any eventuality that might occur and avoid last minute patch solutions.
Based on how PPP works, risks can be classified into multiple sections. Some of the major areas are:
- Production: This involves risks associated with planning, design, maintenance, repairs, construction, environmental etc.
- Commercial: Mainly involves risks related to demand, collection, capacity availability, policy changes, technological changes.
- Contextual: It consists of risks related with fiancé, rules & regulations.
In addition at the time of contract preparation it is important that both the partners must know about the risks associated with the project. Every risk associated with the project must be clearly explained. Besides, the causes that can lead to such risks occurring must also be spelt out. This will help partners to be ready with the solution in case any such situation arises. It is very important that both partners are aware of the possibility of risks and their corresponding impact. The contract stage is a key stage in PPP and is an ideal time to execute such acts.
The second important step according to Lakhani is Risk Allocation.
It is crucial that risks are allocated between the partners so that neither suffers unjust losses due to unforeseen risks.This would help private partners in PPP to minimise the risk and also get work done at the same time.
Third and most important step is identifying solutions for risk minimization says Lakhani.
Now that the risks have been identified, it is also important that solutions for them are also in place for any contingency. After carefully studying the risks, the PPP partners must develop strategies that minimize them. It would be even better if these probable solutions are documented as it will help in future. Even better would be to take these risk minimising measures even before the contract is assigned.
In conclusion the true success of any PPP venture is when it becomes a win-win situation for both parties involved in it. In order to have a long lasting partnership, it is important the project is done with utmost transparency. Identifying, assessing and fair allocation of the risks involved with the project is one of the best ways to achieve it.
"More than that, it will establish trust between both parties that is so crucial for business venture" Arun Lakhani.