Operating risk is the risk that the process for delivering the contracted services (or an element of that process, including the inputs used within or part of that process) will be affected in a way which prevents the private party from delivering the contracted services according to the agreed specifications and/or within the projected costs.
As part of the private party’s acceptance of solution risk (i.e., the private party is given freedom to structure the services in any way it sees fit, so long as the services are capable of meeting the output specification), operating risk should be allocated to the private party.
However, in certain cases Government will accept certain components of operating risk. The circumstances in which Government will accept components of operating risk are discussed in Chapter 24 (Change in Law), Chapter 23.3 (Government initiated modifications to the service standards) and Chapter 20 (Benchmarking/Market Testing) of the Risk Allocation and Commercial Principles for PFPs.
Operating risks are reflected in both the contractual provisions and the payment mechanism. The payment mechanism is particularly important in social infrastructure projects. Developing a payment mechanism requires two core principles:
• Firstly agencies must develop some mechanism to measure the performance of the private party. Performance measurement is critical to PFPs because Government is procuring a service of stated quantity, quality and availability. Performance measurement may be linked to an agreed set of standards or key performance indicators, which will generally relate to quality, timeliness, or other service delivery requirements.
• Secondly it is important to ensure that payments are unitised, so that the overall payment can be reduced if services do not meet or satisfy the agreed set of standards or key performance indicators.