Where the private party is required to accept demand risk, it is critical to quantify demand. During the binding bid stage, provision of as much information as possible on levels of demand will help provide certainty for bidders, and is likely to increase the competitiveness of bids. However, bidders should also make their own investigations as to possible levels of demand (particularly from third parties) and should not rely solely on information provided by the government.
Where the private party is fully exposed to demand risk, government may agree to implement measures to stimulate use by consumers (such as traffic management measures) or to provide redress to the private party if government acts to increase competition to the project by, for example, subsidising alternative public services. (The very complex considerations involved in such government undertakings are set out in the discussion on network and interface risk in chapter 9.)
Where services are received by government only, so that the demand risk to the private party is in government hands, it may give the private party a degree of assurance for government to enter into exclusive concession arrangements granting the private party an exclusive geographic right to provide the contracted services for a specified period within the project term. Potential losses to the private party due to increased competition for the contracted services would need to be justified in light of the gains achieved through reductions in service costs.
The measures above should be adopted with caution and undertakings by government should be limited to the minimum necessary to underpin project viability and optimise value for money.
Government should also take care not to over-estimate its own demand for services, when paying for services on an availability basis and/or contracting to pay for a specified (minimum) level of usage. Overestimating demand will, in effect, result in government paying to insulate the private party from demand risk and subsequently compromising value for money.