Key findings of the Committee: 8.1 The complexity and sophistication of the arrangements and methods of allocating risk underpinning public private partnership (PPP) projects, has increased, over the past decade. 8.2 A large part of the value of PPPs rests with the ability of the government to transfer appropriate risks to the private sector at a reasonable cost. 8.3 Partnerships Victoria is predicated on the idea that the Victorian Government contracts for the provision of services rather than simply for the procurement of infrastructure. 8.4 Partnerships Victoria documentation provides guidance on ten types of risk and outlines the government's preferred position on each risk category. 8.5 PPP projects involve the allocation of substantially more risk to the private sector than traditional procurement. 8.6 Several risks are not included in the Partnerships Victoria guidelines, such as public safety risks, public consumer risks, environmental risks, consultation risks, transparency risks, political risks and public confidence risks. 8.7 Optimal risk allocation seeks to minimise both project costs and the risks to the project by allocating risks to the party in the best position to control them. The value of risks transferred is estimated and included in the public sector comparator (PSC). 8.8 Partnerships Victoria guidance material on risks is detailed. It constitutes a professional 'how-to' manual for staff, and it appears to be generally consistent with many of the long-standing principles of valuation of risk. 8.10 Due to the complexity of PPP arrangements, the government and consortia have high transaction costs. 8.11 Aligning the payment mechanism with the agreed risk allocation and the achievement of government objectives is of particular importance. 8.12 Some real-world risks exist that are not typically the subject of negotiation between government and private infrastructure providers. The government has to stand behind key PPP projects because it cannot allow them to fail. 8.13 The degree to which initial expectations of large savings from contracts differ from experience over the long term operation of the project can result in some large risks going unrecognised. 8.14 The valuation of risks is an area fraught with uncertainty. Partnerships Victoria guidelines noted that there is, in fact, a profitable market in risks, with private parties keen to assume risks for which government pays a high price relative to the likelihood or consequences of these risks materialising. |
The seventh inquiry term of reference required the Committee to assess the framework for risk allocation between the public and private sectors and its application, with particular emphasis on how well risk is assessed, allocated and managed. Partnerships Victoria guidance material on risk allocation and contractual issues states:312
Risk is the chance of an event occurring which would cause actual project circumstances to differ from those assumed when forecasting project benefit and costs. It is at the core of project profitability (for the private party) and efficiency (in delivering public sector objectives). Because management of risks holds the key to project success or failure, projects are about risks, about their evaluation and their subsequent acceptance or avoidance.
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312 Department of Treasury and Finance, Partnerships Victoria Guidance Material, Risk Allocation and Contractual Issues, June 2001, p.16