As a service element of any "sell side" (or "procurer side") transaction advisory mandate involving a PPP/P3, regulated utility, project financing or any other transaction involving a long-term contractual relationship between seller/procurer and the buyer/contractor, we typically provide risk allocation advisory services. Within these types of transactions, it becomes essential that there is a fair and equitable balance between: (i) the contractual allocation of risks and responsibilities between the parties; and, (ii) the potential for returns and potential up-side gains and benefits provided under the contract.
The standard "project finance approach" to risk allocation is that each risk element should be allocated to the party who is best suited to manage and mitigate that risk element. This general premise is fine, but practically in many projects and asset classes there are many risks that neither party can sufficiently control or mitigate. In other cases, where a contractor party may have some degree of control over the particular risk element, the potentially unlimited liabilities related to failure to control the risk are so severe that that party either cannot efficiently price that risk or they simply cannot enter into the transaction unless they have some level of satisfactory protection against the risk. There are certain industries and sectors the we cover, such as nuclear power plants, where there may be a number of risks that simply cannot be fully allocated to the contractual counterparty. In many other infrastructure and project finance sectors, risk allocation models may be "standardized" to a certain extent within particular markets.
DCS advisors have significant experience in formulating risk allocation models for our clients in all the sectors that we cover. We are ideally situated to provide our "sell side" (or "procurer side") clients with value-added advice with respect to the appropriate and optimal risk allocation model, given the particular structure and circumstances of their transaction. Favorable and appropriate risk allocation (versus cost) is one of the key value drivers that we analyze when assessing the value for money (VfM) and cost-benefit of any PPP/P3, project financing or regulated utility transaction or otherwise in the case of any outsourcing transaction. Attempting to shift too much risk to the contractual party will likely drive up capital costs and potentially challenge affordability limits. Too little risk allocated to the contracting party, relative their returns may be a recipe of underperformance or sub-optimal performance. In the case that we are advising an investor/bidder/contractor, we will assist in the proper analysis of risk allocation and negotiate with the counterparty in effort to achieve the optimal risk allocation for the project or transaction.
Developing the proposed optimal risk allocation model with our client is one matter. Under a transaction process, perhaps the more important aspect is negotiating the risk allocation, in parallel with potential returns/up-side expectations, with the potential investors/bidders. DCS experts have significant experience in assisting our clients during such risk allocation negotiations and we are well positioned to assist our clients in achieving the most favorable outcome of these negotiations. In the case that we are advising an investor/bidder/contractor, we will assist them in assessing the cost of accepting risks and through negotiations, advocated that the counterparty retain certain types and levels of risk where it is inefficient, impractical or impossible for our "buy side" (or "contractor") client to accept those risks.
DCS advisors are able to provide risk allocation advisory services on a stand-alone basis on behalf of clients who are pursuing PPP/P3, M&A/privatization orconstruction/service/supply contract transactions. In most cases, as risk allocation advisory services will be only one element of a larger project delivery program, DCS will also be providing numerous other complementary transaction advisory services in relation to other transaction elements. Our preference is always to provide such comprehensive transaction advisory services and coordinate all elements of the transaction, including risk allocation advisory services on behalf of our clients.
Under any risk allocation advisory services mandate, DCS will draw from our global network of veteran industry expert advisor affiliates and our relationship consultants in order to assemble the most appropriate team to match the specific needs of the transaction at hand. This will always include leadership by DCS affiliate experts who possess decades of global public and private sector experience related to the specific sector and transaction type. In any risk allocation advisory mandate, our preferred role is always to serve as the lead project/program manager. Within this role we are also able to assist in the selection and procurement (or subcontracting) and management of the other advisors and consultants, including local and international legal, technical, commercial advisors and indemnity/insurance or other specialized advisors, as the specific transaction may require. To the extent that other third-party advisors are required, there are many value added advantages of allowing DCS to assist in the procurement of these advisors. First, DCS expert affiliates themselves possess many of the legal, technical, indemnity/insurance and commercial skill sets required in those areas and we are best positioned to determine which additional outside third-party skill sets are required and which firms or individuals should be hired in these roles. Second, risk allocation advisory services are a complex undertaking and require the organizational management and coordination of many simultaneous workstreams. DCS advisors are experts in project and program management services and are ideally suited to manage and coordinate a multi-dimensional advisory team most efficiently and effectively.
Complementing our risk allocation advisory services, DCS advisors offer the following complementary advisory services that may be applicable, dependent on the specific transaction situation.
DCS experts provide risk allocation advisory services in the following sectors that we specialize in. Please click on the below links to learn more about the sectors that we cover:
DCS experts provide comprehensive risk allocation services to the following categories of clients: