1. Setting up an adequate institutional framework to manage risks in PPP projects Training event on risk management in PPP projects 26 May 2008 Twinning Project CZ/2005/IB/FI/04 Mikko AJ Ramstedt Senior Project Adviser Financial Partnerships Unit

2. Introduction Background context for risk management Building a sound foundation Developing a governance framework Stage Gate approach Managing public stakeholders Working with commercial advisers

3. Risk in the context of Central / Local Government 1 Benefit realisation Project objectives / outcomes = benefits over costs –Socio-economic improvements PPP = Value for Money –Financial benefit

4. Risk in the context of Central / Local Government 2 Affordability Deliverability Market Response Reputation Stakeholder expectations Political environment

5. Building a sound foundation 1 Role of the Project Team –Identify, quantify, prioritise and manage risks –Create awareness of risks among stakeholders –Develop a formal risk management strategy –Source necessary expertise –Install a culture of risk ownership and individual accountability among team members

6. Building a sound foundation 2 Analytical scrutiny: Multi-disciplinary approach –Expertise Technical, planning, building control, finance, legal etc –Accountability Clear input specification & delegation responsibilities –Key Risk Stakeholders Involvement Management Team needs to be supported by appropriate governance arrangements!

7. Building a Team Project Manager Internal TechnicalInternal FinanceInternal Legal Commercial Technical Commercial FinanceCommercial Legal PlanningTechnical ServicesHR Administrative Communications

8. Developing a governance framework 1 Consider institutional protocols / requirements – who are exposed to project risks? Senior reporting / accountability Financial management

9. Developing a governance framework 2 Identify stakeholders – who are able to influence risks? Project interface matrix Direct & indirect stakeholders

10. Developing a governance framework 3 Constitute steering arrangements –Effective arrangements involve Senior accountable officers –Project Sponsor Key stakeholder representatives Technical specialists

11. Developing a governance framework 4 Set up a risk management protocol –Risk register –Risk management strategy –Clarity over individual roles –Delegation of powers and accountability –Risk monitoring / review process

12. Developing a governance framework 5 Establish lines/forms of communication –Reporting requirements Process Protocol

13. Governance Framework Project Team Internal Resource Pool Chief Executive Senior Responsible Officer Project Sponsor Project Manager Senior Finance Senior Legal Senior Technical Services Senior Communications Senior Planning Senior Technical Services User Reps Union Reps Steering Group

14. Stage-Gate approach Risk management as a continuous process Purpose: –Audit projects at key stages –Maintain local accountability –Quality assurance tool –Market reassurance: minimum standards

15. Stage-Gate approach Stages: Outline Business Case Pre-OJEU notice Pre-Invitation To Participate in Dialogue Pre-Invitation to submit Final Tenders Pre-Preferred Bidder appointment Pre-Financial Close

17. Stage-Gate approach Outline Business Case: Scope, VfM, Affordability, Deliverability (statutory powers, resources, governance, experience / advisers, market, consultations, land, planning, transferability of risks) – policy sign off.

18. Stage-Gate approach Pre-OJEU notice: Market sounding, procurement strategy, PQQ, IM, evaluation criteria, market management strategy, affordability management strategy.

19. Stage-Gate approach Pre-Invitation To Participate in Dialogue: Market / bidder robustness, specification, contractual documentation (CD protocol, specification, project agreement, payment mechanism). Most commonly problems arise over unresolved land, planning and site issues (environmental, geo-technical, topographical, archaeological). Lack of clarity over scope. Inconsistency in ITPD documentation (typically service spec and Room Data Sheets).

20. Stage-Gate approach Pre-Invitation to submit Final Tenders: Pricing strategy, design, land and planning development, lender due diligence, authority consents & sign offs, timetable for FC, construction management, stakeholder consultation, affordability, VfM check, calibration of payment mechanism, contract derogations. Most commonly problems arise over affordability on receipt of bids. Commonly pressure from political climate and original timetable can suggest illogical decisions. Unresolved commercial matters can only lead to upward price movement.

21. Stage-Gate approach Pre-Preferred Bidder appointment: Provisional sums, O/S risks / exposure, land assembly, enabling works. PB appointment letter must be as comprehensive as possible. Affordability problems commonly arise due to programme slippage, scope change and unresolved commercial issues.

22. Stage-Gate approach Pre-Financial Close: Contract management & governance, stakeholder liaison, staff transfers, decant strategy, change mechanism, snagging management, appointment of independent certifier. Continuity and understanding of authority obligations.

23. Stage-Gate approach Process - at each review: 1.Submission 2.Clarifications & Independent review against set criteria 3.Independent recommendations Essential vs. desirable 4.Response / action to recommendations 5.Central Government review of actions taken No action –> HOLD / STOP Positive action –> GO

24. Managing public Stakeholders 1 Includes for example authorities responsible for planning, transport, environmental, health & safety, fire, building control etc, and statutory consultees (Audit Scotland, Scottish National Heritage, Historic Scotland, SEPA etc). Each body will have a defined remit and powers that project sponsors will need to satisfy.

25. Managing public Stakeholders 2 Project team will need to agree: what information is needed, when, in what format, what is the timetable for approval, and who should be involved. Each stakeholder should develop and publish standard approval criteria and engagement protocol.

26. Managing public Stakeholders 3 Managing risks through a communication & consultation strategy –Creates clarity & consistency of message –Maximises impact –Identifies appropriate channels of communication

27. Managing public Stakeholders 4 Communication & consultation strategy Needs to cover: –project development –procurement process –construction phase –operational phase Should be signed off by Steering Group!

28. Managing public Stakeholders 5 Managing stakeholder expectations - Defining key stake-holders –Procuring Authority - - - > Users –Policy Transport, Justice, Education, Health, etc PFI/PPP policy Procurement policy MoF

29. Managing public Stakeholders 6 Risk mitigation through involvement –What are the key public sector controlled risks? Risk identification –Who controls the key risks? Risk allocation –How to mitigate against these risks? Involvement

30. Office of the Rail Regulator Network Rail Scot Rail Franchise Scottish Borders Council Midlothian Council City of Edinburgh Council Passenger Focus Transport Scotland Waverley Transport Partnership Scottish Government

31. Working with commercial advisers Benefits: –Necessary source of expertise –Wider access to critical information –Developing an ‘Intelligent Client’

32. Working with commercial advisers Risks: –Project ownership –Knowledge transfer –Accountability –Authority –Affordability

33. Summary Project governance arrangements need to be able to support efficient day-to-day management of risks. A standardised review process helps to create risk awareness and provide assurance over risk management and mitigation across projects. Fostering ownership, accountability and involvement are key to good project governance and should also guide engagement with external advisers.

34. Mikko AJ Ramstedt mikko.ramstedt@scotland.gsi.gov.uk 0131 244 4940 Questions?