3.1 Before progressing with the establishment or procurement of a proposed JV the public sector body must conclude that each party to the JV is able to deliver its required aims and objectives and that the JV provides the best VfM solution. In particular the public sector body should ensure that any equity holding will justify the value of assets (whether cash or non-cash) which it is contributing. The approach to VfM assessment is described further in Chapter 4.
3.2 In most JVs (particularly 'route to market') early consideration should be given to the required investments and returns and the likely longer term sustainability and attractiveness of the business plan from inception to exit. Initial assessment of project risk is also important e.g. if it is intended that the JV takes on developer risk, how much risk is involved, what is the likelihood of risk crystallising and is it worth the potential returns?
3.3 Consideration of the long term viability of the business should include sources of funding (debt and equity), the investment returns needed to create a sustainable business, projected revenues, liabilities and profit. Funding arrangements, identified in the business plan and to cover unforeseen events, should be addressed as these can considerably dilute the control of the public sector when it is unwilling or unable to contribute additional funds to the JV (see also Chapter 8).
3.4 A key matter for the public sector body, when setting up a JV, is establishing the risks it is taking and those which are assumed by the JV and allocating responsibilities for managing those risks. This will involve obtaining timely information, making contingency plans, and being alert
3.1 for opportunities as well as risks. The aim is not to eliminate risk, but to manage the risk:reward ratio across the risk portfolio17.
_________________________________________________________________________________________________
17 The NAO backs up this message in its report Supporting Innovation: Managing Risks in Government Departments, 2000 (www.nao.org.uk/publications/9900/managing_risk_in_gov_depts.aspx ).