BENEFITS OF RISK MANAGEMENT

A PPP project gets various benefits on undertaking an effective risk management exercise in a structured manner. Effective risk management will lead to improvement in financial management, and governance and operational management. A comprehensive risk management exercise will help in making informed decision while undertaking scenarios or option analysis as part of the financial decision making. Identification and assessment of risks will also help them to plan the mitigation mechanisms well in advance and reduce the financial costs associated with losses due to service interruption, litigation, and even poor investment decisions. The risk management also make the stakeholders aware of each party's tolerance to risk and to what extent they are able to assume them. Allocating the risks to the parties best able to manage the risks will prevent unreasonably pricing of the risk premium thereby enabling effective allocation and use of both the public and private sector resources. Effective management of risk on time will also enhance the managerial control and the project can rely less on crisis management. Identification of risks well in advance will provide an opportunity to the PPP project management team to improve their capacity to manage the risk in the face of the competing obligations and help in setting high standards of accountability and help in promotion of innovation to overcome the adverse effects of the risk.

Risk management also play a role in strategic decision making for the project stakeholders by improving the strategic management through selection of better objectives and associated targets as a result of risk identification, analysis, evaluation, treatment and monitoring process. This provides them a clear idea of the realistic objectives and targets and can help them to prepare to deliver against objectives and associated targets. The risk management process brings in transparency and makes it very clear for the decision makers on the risks associated with the project and actions that can be taken to treat and monitor them.

Comprehensive risk management results in effective allocation of risk between the contractual parties leading to maximisation of the project's value for money. Effective risk allocation will result in allocating the risk to the party best able to manage it. Optimal allocation reduces risk premiums and the overall cost of the project as the party in the best position to manage the risk will be able to manage the risk at the lowest price.