The apportionment of risk to whichever of the contracting parties is able to manage them at least cost is essential to achieving value for money.
Risk sharing between the proponent and the Government must reflect a realistic assessment of benefit apportionment in achieving service objectives. The commercial benefits to be derived from the project must be commensurate with the level of risk assumed by the proponent.
The identification of project risks relies to a large extent on the skill and judgement of the project manager and project team. Risks vary considerably according to the type of project being undertaken, and it is the responsibility of the project team to identify all material project risks.
The level and type of risk to be assumed by the Government must be understood prior to any short-listing of potential proponents and must be both finite and transparent. The apportionment and pricing of risk, however, is a dynamic process that is often finalised only during the negotiation stage, so that project managers need to retain a flexible approach to the risk management process and the impact on project outcomes that different risk profiles may present.
A fundamental principle in risk allocation is that project risks should be allocated to the parties that are best able to manage these risks. The agency's objective must be to achieve an efficient transfer of risks, not simply to avoid as much risk as possible. There are some classes of risk, for example, a change in enabling legislation or government policy that the private sector can never manage efficiently and are always retained by government. Other risks may be shared, for example, the risk of obtaining the requisite planning approvals. Value for money is maximised when the allocation of risks achieves an optimal balance in view of the risks and expected rewards attributed to each party's role in the project.
The main classes of risk that will be apportioned are described in Attachment B.