Once the risks associated with a particular PFI project have been identified the next task is to share the risks between the public and private partners. The Government recognises the principle that "risk should be allocated to whoever is best able to manage it" 56, not risk transfer for its own sake. Private opportunity, Public benefit states that:
As a general rule PFI schemes should always transfer to the supplier design, construction and operating risks (both cost and performance). Demand and other risks should be a matter of negotiation with the value for money impact being tested out, where appropriate, through bids on alternative risk transfer bases against minimum and conforming requirements.
Risks retained by the public sector include:
• the risk of a wrongly specified requirement. Where it is known that requirements cannot be specified in their entirety initially, as in some IS/IT projects, it may be possible to share with the supplier the risk of defining remaining requirements during developments and implementation. The public sector still retains the risk in respect of the initial specification;
• risk of criticism. A failure of a public service, even if entirely the responsibility of a supplier, may result in criticism of the Government or local authority along with the supplier. 57
The risks of a public services project should only be transferred to the private sector if, and to the extent that, the private sector is capable of managing such risk. In situations where the private sector is best judged able to deal with risk, such as construction risk, then the public sector should try and transfer this responsibility completely. Where the private sector is deemed less able to manage project risk, responsibility for these risks should remain within the public sector.
Given that some risks are difficult to quantify, such as the liabilities that would be transferred back to the public sector in the case of a collapsed DBFO hospital project, it is difficult to assess to what extent the transfer of risk can be deemed optimal. The small amount of available evidence on risk transfer available suggests, that at least in some sectors, PFI contracts have transferred to the private sector a substantial degree of responsibility for some of the risks involved in constructing, operating and maintaining public services and financing the assets that support them.58 The National Audit Office (NAO) recently surveyed public and private partners involved in 121 PFI projects prior to 2000.59 Over 95% of both partners agreed that the allocation of risk was either wholly or partially appropriate. However, the views of the partners varied when asked whether they believed the projects' risks had been allocated optimally. 80% of public sector partners thought the allocation of risk wholly appropriate while only 50% of the private sector partners agreed.
An efficiently designed PFI project contract should involve the optimum transfer of all types of risk. Where the financial risks of a public service project cannot be transferred to the private sector, different forms of public private partnerships (PPPs) other then the PFI should be investigated such as design, build and operate (DBO) projects. With all this in mind, the main argument put forward by proponents of the PFI, that it provides value for money through the transfer of risk, would be better defined as value for money through the 'optimal allocation of risk'.
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56 HM Treasury, Private Opportunity, Public Benefit Progressing the Private Finance Initiative, November 1995.
57 ibid.
58 OGC, DBFO - Value in roads: A case study on the first eight DBFO road contracts and their development, OGC web site as at 13 December 2001: www.ogc.gov.uk/pfi/
59 NAO, Managing the relationship to secure a successful partnership in PFI projects, HC 375 Session 2001/2002, 29 November 2001