A major component of any public private partnership is risk allocation. Who will assume risks in the delivery of a service or in the construction, operation and maintenance of infrastructure is often the central question in a public private partnership. The project team should attempt to reduce risks to the best of its ability. However, risks are inherent in most local government projects and servicing initiatives.
There is some debate as to how much risk should be transferred from the public to the private sector in these types of partnerships. Generally, the more risk transferred to the private sector partner, the more financial reward the private partner will demand. Risk should be allocated to the party who can best assume it.
From the standpoint of the local government, there are several political risks that need to be addressed. These include:
• loss of control in the provision of infrastructure or in the delivery of a service
• potential reduced service quality for service users
There are also a number of other risks inherent with infrastructure or service delivery projects that need to be analyzed and understood by both public and private sector partners. Examples include risk associated with:
• fire, flood, etc.
• changes in financing costs
• reduced demand for service or failure of demand to increase as projected
• design errors
• construction-related problems, including failure to meet the schedule and/or quality issues
• ownership transfer
• environmental liability
• non-compliance with regulations and permits, or changes in regulations
• employment practices and changes in labour legislation
• performance monitoring
• technology issues (failure of existing technology, inappropriate choice of technology)
• force majeure (that is, dealing with major change arising beyond the control of either party, including acts of God, natural disasters, court orders, war)
• insolvency of private sector partner
• inflation/currency strength
• value of assets at end of partnership, change of ownership
This list of risks is not exhaustive. It is intended for local government to understand that there are a number of risks that can be shared between the public and private sector partner. How these risks are shared will be largely determined by who is best able to assume these risks at the least cost.