Understanding Basic Risk Management System

Outline

• Understanding Risk• Risk Management Process• Component of Risk Management Tool• Exercise: Fill in a Risk Management Tool for a

sample project• Risk Allocation Principles

Understanding Risk*• Risk can be defined as an uncertain event which, if it occurs, may cause actual project

outcomes to differ from expected outcomes.– Could you give an example of risk that you face on a daily basis?

• Risk Assessment is an evaluation of the likelihood of identified risks materializing and the magnitude of their consequences if they do materialize.– What are the likelihood of the risk that you face?– If the event occurs, what would be the likely consequences?

• Risk Allocation is an allocation of the consequences of each risk to one of the parties in the contract, or agreeing to deal with the risk through a specified mechanism which may involve sharing the risk.– Could you allocate the risk that you face to other party who might be better able to manage it?

• Risk Structuring defines the optimal risk allocation for the contract so as to decide which risks will finally be assigned to the private partner and to what extent, as well as which risks will be retained or shared by the public authority and to what extent.– Other party may not want to take all the risk that you face, what would be the optimal risk

allocation that you and the other party are willing to accept?

* Adopted from APMG, 2016, PPP Certification Guide; https://ppp-certification.com/

Risk Management Process

Source: Institute of Risk Management, 2010, A structured approach to Enterprise Risk Management (ERM) and the requirements of ISO 31000http://www.ferma.eu/app/uploads/2011/10/a-structured-approach-to-erm.pdf

Basic Risk Management Tool

Drought Dry spell during rainy

season

Early Warning System

2 3 6 ??? Irrigation Department

Risk Assessment Map

High Risk

Moderate RiskLowRisk

OccasionallyMild Impact

(3,2)

Adding Climate Change Risk

• How the Risk Profile would change with an introduction of Climate Change Risk?– Likelihood• Change in variability of an event• Change likelihood of an event

– Impact• Change in intensity of an event• Change in boundary of the impact

Adding Climate Change Risk to Basic Risk Management Tool

Drought Dry spell during rainy

season

Early Warning System

4 4 16 Build Medium Size Reservoir

with distribution

system

Irrigation Department

Risk Assessment Map

High Risk

Moderate RiskLowRisk

OccasionallyMild Impact

(3,2)

LikelySignificant

Impact(4,4)

Common Risk Categories for a Project

• Siting—risks associated with the availability and quality of the project site

• Design, construction and commissioning—risk that construction takes longer or costs more than expected.

• Operation—risks to successful operations, including the risk of interruption in service or asset availability

• Demand, and other commercial risk—the risk that usage of the service is different than was expected, or that revenues are not collected as expected– Regulatory or political– Change in legal framework– Default– Economic or financial– Asset Ownership– Force Majeure

Source: The World Bank, ADB, IADB, 2014, Public-Private Partnerships Reference Guide Version 2.0http://documents.worldbank.org/curated/en/600511468336720455/Public-private-partnerships-reference-guide-version-2-0

Exercise: Project Level Risk

• A medium-size reservoir with distribution system project is proposed to build resilience for smallholder farmers to cope with increased variability and prolonged dry-spell during rainy season

• In 2 groups, let’s complete a Risk Management tool for this project with 3-5 Risks with 20 minutes.

Risk Management Tool forAn Irrigation Project

Siting Residents may oppose to land

acquisition

Legal Action 4 4 16 ??? Irrigation Department

Operation Low service quality due to

lack of operation and maintenance

expenses

Annual Budget Request

4 4 16 ??? Irrigation Department and Water User Group

Risk Allocation Principles

Each Risk should be allocated to the Party:• Best able to control the likelihood of the risk

occurring• Best able to control the impact of the risk on

project outcomes, by assessing and anticipating a risk well and responding to it

• Able to absorb the risk at lowest cost

Source: Ibid