Risk analysis merits detailed attention because the final allocation of risks between the private and public sectors forms the backbone of the service contract and is the primary determinant of value for money. The identification, valuation and allocation of project risks are part of an iterative process that is refined throughout the project's development and is incorporated in the overall costing analysis in the final business case.
The risk analysis should provide a summary of the risks that can be transferred to the private sector and, where possible, an estimate of the expected cost of transferring those risks. The initial risk allocation should be based upon an objective assessment of which parties to the project are most capable of managing a particular risk or group of risks.
A thorough financial model is the principal mechanism for determining if a given project is potentially a viable PPP. The analysis in the financial model should be presented in the form of a scenario analysis incorporating all project risks and must encompass the entire life of the project to ensure that risks that may arise in the future are identified and valued.
Risk analysis is discussed further in Attachment E.