Much of the above risk transfer can be achieved under traditional government-funded delivery models. In particular, government can achieve the same risk transfer in relation to the design, construction, operation and maintenance risks, and the risk of loss or damage, by directly engaging the D&C contractor and the O&M contractor under contracts identical to the D&C and O&M contracts described above.
However, government achieves additional risk transfer under a PPP that isn't achieved under more traditional procurement models.
First, in the case of user-charge PPPs, demand risk is typically transferred to the SPV and its equity investors and debt financiers. This risk generally remains with government under government funded delivery models, including service-payment PPPs. While demand risk can be transferred under delivery models that don't involve private finance, it is the equity investors and debt financiers, as opposed to private sector contractors, that have the financial capacity to absorb demand risk.
Second, under the PPP model, the private finance provided by the SPV's equity investors and debt financiers provides government with a buffer against the risks of contractor insolvency, and default for which the contractor's liability is capped or excluded. In particular, government is partially protected under a PPP, because the equity investors and debt financiers will generally invest additional resources in solving problems caused by contractor default or insolvency if failing to do so would reduce the value of their investment or loan. The additional resources provided by investors or financiers may be sufficient to solve the problem, in which event government is shielded from the risk. It is only when the investors or financiers are unable or unwilling to provide further resources to solve the problem that the risk shifts back to government.
Third, the imposition of the SPV between the government and the contractors on a PPP can have the practical effect of shielding government from claims made by the contractors for extra time and/or extra money. On a PPP, such claims by contractors must be brought against the SPV in the first instance. It will then be a matter for the SPV as to whether or not the claim should be passed upstream to the government. It is in the SPV's interest to maintain a good working relationship with government on a significant contract that might run for decades. Accordingly, the SPV will prefer to resolve such claims with its contractors before passing them on to government. Further, many PPP contracts are structured so that the government agency does not need to administer regular claims by the SPV for payment or extensions of time during the construction phase. By keeping government out of this contract administration task, the risk of liability arising from poor contract administration practices is reduced.
Finally, on most PPPs, the government agency is not required to make any payments until construction is completed and service provision commences. Accordingly, the risk of government making progress payments under a traditional construction contract in respect of a facility that may never achieve completion, or that doesn't work as intended, is avoided, at least in theory. The reality is often more nuanced than this on a PPP, as the most effective way of government achieving the outcomes it was seeking will often involve getting the incumbent D&C contractor to complete and/or fix the incomplete or defective facility, rather than starting again from scratch with a new D&C contractor. Even so, government's negotiating position in such a scenario will typically be superior in the case of a PPP compared with more traditional procurement models.