A large part of the value of public private partnerships (PPPs) rests with the ability of government to transfer appropriate risks to the private sector. This chapter defines risks, briefly presents the Partnerships Victoria policy on risks, comments on how risks are assessed, allocated and managed and assesses the Partnerships Victoria framework.
Risk is defined in the Australian Standard for Risk Management as follows: 313
Risk arises out of uncertainty. It is the exposure to the possibility of such things as economic or financial loss or gain, physical damage, injury or delay, as a consequence of pursuing or not pursing a particular course of action. The concept of risk has two elements, the likelihood of something happening and the consequences if it happens.
The early work of Dr R Arndt for the Department of Treasury and Finance included the perspectives of the infrastructure industry.314 At this time the industry believed that the government had a stronger bargaining position in tender processes and used its bargaining power to transfer excessive risk to the private sector. According to the industry, this risk transfer was not fully priced because of competitive pressures.
The infrastructure industry was also uneasy about entering into contracts with government when government also had the role of umpire and could change rules during the life of the contract. It also revealed concerns that negotiations were sometimes unnecessarily lengthy, that government did not appreciate the costs imposed on bidders by late release of documentation by government, and that there was little sophisticated numerical analysis in risk assessment.
The real determinant of a private investment in infrastructure policy is not how the contract looks initially, but:
• how the parties perform in practice;
• the services delivered;
• the risks borne; and
• the costs of actually bearing risks.
To determine the relative success of the private investment strategy, therefore, the whole lifecycle of contract agreement, monitoring, resolution or negotiation of any disputes or shortfalls, through to the renewal of contract arrangements, need to be acknowledged and measured.
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313 MAB/MIAC, Report No.22, Guidelines for Managing Risk in the Australian Public Service, October, AGPS, Canberra, 1996, p.10. The APS Guidelines are based on the Australian/New Zealand Standard for Risk Management (AS/NZS4360:1995)
314 Dr R Arndt, Private provision of public infrastructure: Risk identification and allocation project, survey report, collaborative project, Department of Treasury and Finance, 1999, p 48