18. The Committee has considered reports on the Passport Agency and National Insurance Recording System 2 deals, where the contractor failed to deliver the service required yet costs were borne by the relevant department, so there was a lack of real risk transfer.35 The OGC said that effective risk transfer was being achieved in certain PFI contracts and in some the private sector partner, having failed to perform adequately, was suffering significant financial penalty. For example, on the PRIME project the contractor had suffered a performance penalty of £5.6 million which had acted as an incentive for the contractor to improve.36
19. There was now a much better understanding among public sector clients that certain types of risk that could not be transferred, particularly the ultimate responsibility for delivering a public service. As risk management techniques were developed within the public sector, with an understanding that there were retained risks, focus was being sharpened on what sort of risks authorities could sensibly seek to transfer to the private sector and those that would have to be retained in the public sector. The public sector would always try to extend the envelope of risk that the private sector would take. What would be the optimal allocation today would not be the optimal allocation tomorrow. The Gateway Review process examined risk transfer in individual projects and it was developing enhanced guidance for accounting officers on risk management systems.37 The Major Contractors' Group said the private sector had struggled significantly with the additional risks they were asked to take on board as a result of the PFI. There was now a debate, which it considered healthy, on which party was best able to manage each individual risk.
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35 22nd Report from the Committee of Public Accounts, Delays to the new National Insurance Recording System (HC 182, Session 1998-99); 24th Report from the Committee of Public Accounts, The Passport Delays of Summer 1999 (HC 208, Session 1999-2000)
36 Qs 191-192