Identification and optimal allocation of risks to the party best able to manage them is integral to achieving value for money with public private partnerships. By their nature, the public and private sectors have differing capacities to manage the various risks associated with an individual project. As such, an understanding of how each party can cost, manage or mitigate a project's risks is an important component in achieving optimal risk allocation.
In traditional procurement practices, government generally takes responsibility for the majority of project risks (subject to contractual remedies for non-performance). Under a public private partnership arrangement, government can allocate specific risks to the private sector that they can best manage and price most competitively. It is important that risks that cannot be effectively managed by the private sector are not allocated to them, as the private sector will require significant compensation for accepting unmitigated risk.
As a fundamental principle, risks should be allocated to the party best able to manage the risks. This principle applies to all procurement strategies and contracting models and government must fully assess all risks to determine its preferred position on risk allocation. The government's focus is to align project and commercial objectives and to drive behaviour through effective risk allocation that can deliver good results in terms of time, cost and quality.
The expected cost of all material risks to be borne by government should be incorporated into the public sector comparator. Costs retained by government under any public private partnership project alternative should be included in the partnership model.
The risk allocation matrix provides a summary of all risk assessments and material risks associated with the project, and identifies the government's preferred (optimal) allocation of those risks. The risk allocation matrix forms the basis of the proposed contractual relations that government would present to the market in seeking binding bids.
For further detail on the identification and allocation of risks, refer to the risk management supporting document.