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25 who benefits from a freight improvement project, it is easier · Feasibility --Demonstrable feasibility with respect to eco- to assign responsibility for a project at a level that is propor- nomic market, technical, environmental, financial, and tionate to the benefit received. This is very useful when risk allocation aspects is important; entering into a project where several different stakeholder · Risk management--A clear understanding between the types, including carriers, public agencies, and communities, allocation of risk and benefits/rewards is critical; are involved in project planning, approval, and financing. In · Transparency in procurement--Good access to relevant addition, understanding the benefits received by user groups materials allows for accurate evaluation of benefits and can help to highlight those situations where there may be a costs, which in turn reduces the need for estimating values compelling public interest in supporting freight network of withheld information; improvements. · Proper due diligence--Verifying actual and projected volumes/turnover, costs, revenues, and risks; · Public-sector "buy-in"--Identifying issues pertaining to 2.5 Assessing Risk permitting and acquisition; Risk assessment has been a critical component of private- · A strong and "true" partnership--Should be set forth in sector investment decision-making for a long time. Monitor- a clear contractual framework; and ing safety, regulatory compliance, and emissions is important · Innovation--In handling costs, risks, and revenues. because the costs associated with risk experience can be very high, and sizable loss can be devastating to small firms. Risk Understanding the risks associated with a project involves management metrics also have a role in customer satisfaction, evaluating design and construction, market risk, operation potential market development, and market access. All of the and maintenance risk, financing risk, insurance, and termi- functions in this category can have a direct cost--insurance, nation risk. The private sector often is interested in under- employee safety and retention, financial penalties and down- standing the uncertainty that surrounds forecasts and proj- time, etc. On the public-sector side, risk management tech- ects. A number of tools can be consulted to address these risks, including a risk allocation matrix and due diligence niques are typically included in asset management strategies financial and technical risk analysis through statistical means. for pavements, bridges, and other investments. Rarely are risk When engaging in PPPs, a common practice is to develop a management techniques employed as part of the investment risk allocation matrix that clearly outlines categorical risks and decision-making activities of these agencies, including freight the responsibilities of each party. Risks are allocated and quan- investments. tified to clearly describe the various scenarios, costs, and However, risk assessment has taken on more importance responsibilities involved. Areas of concern may include insur- among public-sector agencies given recent interest in utiliz- ance, permitting, design, and construction, among others. ing public-private partnerships (PPP) or shared asset activ- Table 2.6 outlines the general types of risks that are accounted ities. The emphasis placed on financial evaluation is typical for, and which parties may take responsibility for these risks. for private-sector projects, but the degree of analysis devoted Each conceived risk should be collected and quantified in to risk assessment stands out, and (according to players a detailed risk matrix as shown in Table 2.7. The basic ele- in this market) exceeds that to which the public sector is ments may include accustomed. PPPs provide a route to funding and operat- ing a project by accessing private-sector funds and support. · An explicit explanation of the risk event or scenario, accom- It is a partnership that is marked with differences, however, panied by logical and achievable remedies and solutions; because the public sector is responsible for promoting proj- · A rating of the potential of the occurrence of such a risk; ects for the good of its constituents, and the private sector · The party primarily responsible for the risk; and functions and operates based on its bottom line. Financially, · The percent share of the risk by party, along with the dol- they have evolved separately and rely on different sources lar value of the cost. of funds. For the private sector to participate, the public- sector agency should have established policies, processes, As a part of evaluating investments, a common practice is and frameworks that facilitate a partnership, including the to develop forecasts; these carry an obvious degree of uncer- following: tainty. Risks can be technical and financial, including cost overruns and benefit shortfalls. Monte Carlo methods can be · Structure--A functional regulatory and institutional used to simulate the various sources of uncertainty that affect framework acts as a roadmap for proceeding; the outcome of projects, with respect to costs or benefits, and · Public need--A demonstrated need for such a partnership calculate an average expected value for the given possible val- adds purpose and mutual goals; ues of the components.
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26 Table 2.6. Types of risks and risk allocations. Risk Private Public Legislative Sharing within defined parameters Major responsibility (Existing and Future) Acquisition and Sharing within defined parameters, Major responsibility Environmental with public-sector assistance Permitting and Planning Sharing within defined parameters Major responsibility Design and Construction Major responsibility Operation and Maintenance Major responsibility Sharing within defined parameters Financing Major responsibility Termination Major responsibility, unless demonstrably caused by public Insurance Major responsibility Sharing based on availability of commercial rates Force Majeure Sharing based on event and Sharing based on event and availability of insurance availability of insurance Source: Halcrow, Inc. Table 2.7. General template of risks. Risks Input Overall Risk Characteristics Category of Risk Risk type Description Event/scenario being addressed Party Primarily Bearing Risk Party 1 Risk Share Y percent Party 2 Risk Share X percent Risk Value (in USD) Dollar value Annualized Value at Risk ($k/year) Dollar value Optional Additional Risk Controls Remedies and proposed solutions Party Best Able to Direct Mitigation Party X Effect of Additional Risk Controls on Level of Risk High, medium, low Residual Risk Percentage Annualized Residual Value at Risk ($k/year) Dollar value Basis for Risk Allocation Unit of measure Party-Specific Risks Party 1 Percent Share of Risk Pre Mitigation Risk Dollar value Post Mitigation Risk Dollar value Party 2 Percent Share of Risk Pre Mitigation Risk Dollar value Post Mitigation Risk Dollar value Source: Halcrow, Inc.