The philosophy underpinning risk allocation in the Victorian PPP policy is one of 'optimal risk allocation'. It seeks to minimise both project costs and risks by allocating risks to the party in the best position to control them.
The extent to which there can be complete allocation of risks between the government and private sector parties to PPPs is questionable, given government's ultimate responsibility for public services and its inability to transfer what might be described as its political risks and obligations to the electorate. Evidence presented to the Committee drew attention to the gap between formal risk allocations in PPP arrangements and the real world responsibilities that will ultimately be linked back to government if problems with projects or services are encountered. Experience from completed projects suggests that both the government and the private sector, in practice, are often poor risk managers, with some large risks going unrecognised and other risks inappropriately managed.
In terms of Victoria's record to date in managing risk allocations for PPPs, the Committee heard from the Auditor-General that:
• early projects involved the provision of guarantees and indemnities by government to the private sector, which had the substantive effect of reverting major financing risks back to the state;
• the allocation of risk between the public and private sectors has substantially evolved over time, and private investors are now more willing to accept certain levels of risk including those of an operational nature;
• with projects such as the Latrobe Regional Hospital and the Metropolitan Women's Correctional Centre, both of which were entered into in a highly competitive environment, the government opted to regain control principally because of its underlying obligation to provide the related services;
• while responsibility for service delivery may be allocated to the private sector, consumer risks, environmental risks, public consultation risks, transparency risks and public confidence risks cannot ultimately be separated from government; and
• the increasing sophistication of PPPs highlights the importance of government ensuring it retains sufficient levels of knowledge and expertise within its ranks to effectively oversee PPP negotiations and to meet its ongoing duty of care associated with the delivery of public services.
The Committee concurs with the points raised by the Auditor-General and considers it critical that the government have effective strategies in place for continuing strong oversight of PPP projects (including risk allocations) in light of their growing sophistication and widening boundaries. The Committee also considers that the government should rectify the current vacuum in publicly available information on the state's performance in the management of risks in PPP projects.