The PSC should be developed on the basis of the risks that are to be apportioned amongst the parties according to which party will be able to manage a particular risk more efficiently than the other party. Control over the risk allocation process is best achieved by constructing a risk matrix that will ultimately form the basis of the contract with the private sector proponent(s).
Each identified risk must be costed within the PSC and grouped according to whether the risk will be retained by the Government, shared or transferred to the private sector. The initial allocation may be provisional, pending negotiations with private sector proponents as to the final risk allocation. These costings are used to adjust the base costing, as illustrated in to provide a full risk adjusted cost of the project.
In undertaking a risk assessment, it is also important to distinguish between discrete and correlated risks. In some instances, the occurrence of particular event is dependent upon the occurrence of a prior event, or sequence of events. It is therefore important to prioritise risks not only according to their importance in affecting project outcomes, but also the likelihood that their occurrence will trigger other events that may not have otherwise occurred.
As a general rule, the risk arising from a project fall within two broad categories:
◼ the development phase, where the majority of risks relate to the capital costs of the project, including design, construction and commissioning costs; and
◼ the operational phase, where the majority of risks relate to revenue (if any) and recurrent costs, such as wages, utilities, asset maintenance and insurance, to name a few.
An example of a risk matrix is provided in Appendix 4.