After risks have been initially identified in concept and assessed (determining the likelihood of risks materialising and the magnitude of the consequences), they are allocated to contract parties. The philosophy adopted in Partnerships Victoria in the allocation process is one of 'optimal risk allocation'. Department of Treasury and Finance guidelines explain that:318
Optimal risk allocation seeks to minimise both project costs and the risks to the project by allocating particular risks to the party in the best position to control them. This is based on the theory that the party in the greatest position of control with respect to a particular risk has the best opportunity to reduce the likelihood of the risk eventuating and to control the consequences of the risk if it materialises.
Allocating risks in this manner creates incentives for controlling parties to use their influence to minimise risks and achieve their outcomes in the interests of the project, (at least in concept). Risks may be borne by government, private parties, or, where no party has control over the risk, by the end consumer, if appropriate. The value of risks transferred are estimated and included in the public sector comparator (PSC), to allow a comparable value for money assessment.319
The Risk Allocation and Contractual Issues guidelines state that as with the United Kingdom PFI, the Partnerships Victoria policy 'requires a total shift in mind-set to see [public private partnership] as an opportunity to procure services, leaving the risks of ownership and operation of the asset with the private sector'.320 As part of this shift, the guidelines state that government should: 321
• articulate the policy objectives it wishes to achieve through the partnership;
• identify the service it is seeking from the private party and specify the outcomes and outputs of that service;
• identify the core services (if any) that government will deliver from the facility; and
• structure the most suitable payment mechanism for the provision of the private party's service/output specifications, (identified above) in accordance with government objectives for the project.
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318 ibid., p.20
319 Department of Treasury and Finance, Partnerships Victoria , 2000, p.10
320 UK Private Finance Panel, as cited in Partnerships Victoria, Department of Treasury and Finance, Risk Allocation and Contractual Issues, June 2001, p.19
321 ibid.