9. Good risk management is at the heart of every successful PFI project and is evident during all phases of acquisition. However, the risk management tools and techniques used on PFI are no different to any other form of procurement. It is therefore essential all PFI projects must comply with MOD policy and guidance on risk management as detailed in the tactical layer of the AOF (under the heading Risk Management). All PFI projects shall also comply with the HM Treasury Appraisal and Evaluation in Central Government "The Green Book" and JSP 507 MOD Guide to Appraisal and Evaluation.
10. However risk management in PFI is a 'mindset' and approach to every day business not a software tool or management information process. It should not be viewed as 'in addition to the day job' - it is the day job. Every negotiation or discussion between MOD and industry should be based on trying to better understand risks and to manage them. A key role and indeed benefit of third party lenders to PFI projects is their need and ability to do detailed risk based due diligence to ensure all project risks are identified, analysed, allocated, mitigated, and managed.
11. Risks should be allocated on a value for money basis to the party best able to mange and cost risks on a through life basis. Note there is a tension here, as it is not always the case that where risks are best managed aligns with the party best able to cost them. MOD should not automatically seek to transfer risk to the contractor without making an informed value for money judgement. To make this judgement requires a thorough understanding of:
(a) the nature of the risks to the project,
(b) the way in which these risks affect the ability of the private sector to deliver the service,
(c) the degree of control that the private sector has of the risks,
(d) the cost to the public sector of managing the risk, and
(e) the way in which the private sector can manage these risks.
12. The risk allocation will also have an impact on the accounting treatment that will determine whether the project is on or off balance sheet.
(Note: Whilst value for money must always remain the key driver for a project, project managers should be aware that balance sheet treatment can have a significant effect on the affordability of a project to the Authority)
13. All PFI projects shall have a clear understanding of how risks are allocated between MOD and industry, and this strategy for risk allocation shall be developed during the earliest stages of the procurement and is essential before and during industry engagement to drive dialogue. Therefore all PFI projects shall complete a risk allocation matrix prior to any formal engagement with industry (i.e. issue of an OJEU notice) and keep this updated throughout the projects lifecycle. Projects already in procurement or signed/operational are encouraged to complete a risk allocation matrix to assist with risk management.
14. Establishing a risk allocation matrix is a fundamental requirement for an effective risk allocation and management process. The matrix provides a structure that ensures all areas of risk are considered and that risk is addressed consistently with industry. It also informs the projects risk register.
15. The matrix should list the key elements of commercial risk and indicate MOD's position with respect to risk ownership in each area (specifically whether the risk is owned by MOD or the Contractor). However, acquisition teams should avoid being lulled into thinking that a risk allocation matrix (or risk register) articulates a complete view of risk with industry. It doesn't as industry will have their own risk register to manage the risks they have been allocated. However, the risk matrix does provide a useful summary of the Contract which itself articulates risk allocation through its terms and conditions. Every clause in the contract will address risk of one sort or another and should therefore be captured (and mapped) in the risk allocation matrix and risk register.
16. Annex A contains a template risk allocation matrix for a standard SoPC4 and MOD PAv1 compliant deal. However, the allocation of risk will vary according to the specific circumstances of an individual project. There are a number of risks that are of particular importance within PFI contracts, e.g. construction, availability/performance, demand, design, financing, site risks, obsolescence, residual value, default, changes in specified costs, third party revenue, pass rate, macro economics, change in law, and credit risks. Further details of these risks can be found by following up the further reading and support outlines below.
17. Some care should be taken in establishing the key principles underpinning the risk allocation matrix as these will shape the viability of the various procurement options. Indeed, the acquisition team will also need to be understand the risk allocation of the alternative procurement options to PFI as part of the investment appraisal as PFI's are often criticised for failure to manage certain risks when in fact it was never the intention to transfer those risks to industry as they rest with MOD under all procurement options.