The second leg of the risk equation is "Who is best placed to manage the costs of the event if it does occur?" In many instances, this will be the same party that is best able to reduce the probability of the risk occurring, but there will be instances where these parties differ. Such circumstances may lead to the conclusion that it is better for the contract parties to share a risk. For example, the occurrence of force majeure events-such as fire, flood, sonic boom, or volcanic ash cloud-are beyond the control of the private sector, but private-sector players may be able to adjust their operating service to minimize the impact of these events, in terms of both cost and time, on the infrastructure. So, in this instance, the two parties may wish to share the risk.
When considering both parts of the risk equation, consideration needs to be given to how to mitigate the risk. Some of the options, among others, that might exist include:
• Contractual option: Once the allocation of risks has been worked through, the contract must be clear on the respective responsibilities of all parties to ensure that there are no "orphan" risks. This can be an issue not only in the terms of the contract between the public and private parties but also with the private parties' subcontract arrangements. Often, in order to support the allocation of risks, the parties will seek additional guarantees or warranties to back up their obligations. Such guarantees may take the form of supporting the performance of the party and/or giving financial backing should that performance fall short of what is required.
• Financial option: The lenders are likely to put conditions on their finance contracts to try to mitigate certain risks. For example, if there is a construction phase, the lender might retain a small percentage of the borrowings to create a small reserve of funds to be released only on the completion of the work. Alternatively, the lender may embed reserve-account mechanisms in the finance documents to deal with variable costs-for example, to deal with major maintenance matters over the life of the asset.
• Insurance option: In many instances, risks can be insured against. The main decisions to be made are then whether the insurance represents good value for money or if the party prefers to self-insure; who takes the risk on the premiums changing over time; and who takes the risk on the availability of insurance over time. For example, in the United Kingdom, at times it has been very difficult to insure schools because of the high risk of arson. Also major terrorism events can affect the cost and terms of insurance.
• Portfolio option: Whether the risk sits with the public or private sector, consideration should be given to the extent to which individual project/opportunity risks can be mitigated, or possibly accentuated, by a portfolio effect. For example, an equity investor with a global portfolio may be willing to take a degree of political risk with one investment if that risk does not sit with its other investments, because looking at the risk on a portfolio rather than on an individual investment basis lessens the potential impact of the threat. The challenge will, of course, become more of an issue as the predicted risk will mean more specialist investors who may find they have more systemic risk in their portfolios (see also Chapter 3c.3).
Assessing risk is at the heart of any business, and in this respect infrastructure is no different. Where infrastructure probably differs from mainstream corporate activities is, first, in its reliance on the performance of a single asset to deliver a profit; this creates a need to understand in detail the challenges to achieving the required performance. Second, much infrastructure involves a relationship between public and private parties, whether this relationship is established through partnerships, concessions, regulations, or users.
Investors and lenders will spend much time considering the risks they will accept, based on historical performance, specialist advice, and so on. But they will always struggle to accept some particular events that may be regarded as uncertainties and beyond their ability to control or manage in any way. Given this, it is likely that the public sector, rather than the private one, will need to "own" and manage many of these uncertainties.