Generally speaking, private parties take on risks if they can be appropriately priced, managed and mitigated. Management of risk may involve transferral of risk by a private party to a third party, by way of sub-contractor insurance. For example, although there is a risk that an innovative design for a project may not be suitable for the designated purpose, that risk may be partly mitigated by appointing an experienced (and insured) designer. In this case, the private party then accepts the financial consequences of the risk, provided it can earn a commensurate return.
The degree of competition among bidders, and the bidders' strategic aims often may affect the size of their expected return. For example, if a bidder is keen to develop a presence in an industry sector, it may be prepared to accept a reduced risk-adjusted return on a project in the short term.
If the risk is one with a significant probability of interrupting or diminishing the payment stream that will service debt, the private party (debt financiers) will demand a significant premium to accept that risk. This significantly increases the cost of financing the project. The private party's uneasiness in taking these types of risks becomes more acute when the risk is not within its control. In such cases, it may be possible to change the nature of the risk or the scope of the project so that the private party can better manage the risk. Alternatively, it may be more cost-effective for government to assume or share the risk to reduce the costs of financing the project, or alternatively, finance the project itself. Generally, the private sector (including financiers) makes a consideration of a project as a whole and may be willing to accept higher risks in certain areas if they are balanced out by lesser risks in others.