Long-term contractual arrangements always involve risks, and the essence of a successful partnership is the clear allocation of risk between a municipality and its partners. When risk is transferred to a private operator, the management discipline of the operator is brought into the delivery of a service. It gives the partner a real stake in the success of the venture. This does not mean that the municipality can avoid all risk. While the efficiency gains obtainable from private sector involvement are based on private entrepreneurs' willingness to venture into risks, private investors do have risk ceilings. They are not likely to be interested in partnerships if borrowed capital cannot be paid back in a timely fashion or if inflexible government or municipality attitudes create pricing delays or obstruct projects.
In general, the deal should be structured so that each risk lies with the partner that is best able to manage it. In this way, value for money is obtained because appropriate allocation minimises the price of the risk. Where the private party has better systems and knowledge to manage risk efficiently, the PPP will achieve value for money. The municipality must, however, avoid placing arbitrary or onerous burdens on private partners. PPPs should not be adversarial relationships; government must always be fair and reasonable in taking its negotiating positions with respect to risk-sharing. It is also important that the municipality deals with those risks it has control over. For example, government is normally in a better position to manage legislative risk and would obtain little, if any, value for money by transferring that risk to private partners.
On the whole, risk management aims to minimise risks, either by eliminating them, reducing the costs of controlling them, or reducing the financial consequences of the risks that materialise. This requires the systematic identification and quantification of the risks associated with a project, including each possible event that could result in failure to achieve project objectives. Risk management therefore entails clear identification of the controllable elements of each risk and the assignment of responsibility for controlling that element. For example, completion risk may be considered the risk of the construction contractor, but in reality it has many sub-components, including environmental clearances and the securing of the appropriate building and operating permits from local authorities. To the extent that government and municipalities can facilitate clarity in the project implementation process and reduce the levels of uncertainty regarding their own roles in a partnership, perceived risks and costs may be reduced.