There are some limits to how risks can be allocated in a PPP project. These include the following:
• Level of detail of risk allocation-in theory, every project risk could be identified, and allocated to the party best able to bear it, thereby improving value for money. In practice, as Irwin describes [#161, pages 63-65] the cost of doing so would be high, and likely outweigh the benefits in the case of less significant risks. In most cases, risks are allocated in groups, sometimes with exceptions for certain significant risks. For example, the private party may bear all construction risks, except certain key geological risks, against which the government could provide a particular indemnity
• Risks that cannot be transferred-certain types of risk cannot be transferred through the PPP contract. For example, the private party will always bear certain political risks-in particular, the risk that the government will renege on the contract or expropriate the assets. International institutions such as the Multilateral Investment Guarantee Agency (MIGA) provide political risk insurance to help mitigate this risk
• Extent of risk transfer to private party-the equity holders of the private party to the PPP contract-the PPP company-are only exposed up to the value of their equity stake. Moreover, lenders will typically only accept a relatively low level of risk, concomitant with their expected returns. In practice, this means that the extent to which risk can be transferred is limited by the level of equity in the project company, as described by Ehrhardt and Irwin [#72]. If losses due to a risk turn out to be greater than the equity stake, the equity holders can walk away from the project. Since the government is ultimately responsible for making sure services are provided, the remainder of the project risk remains with the government-as described by Iossa et al [#159, page 25].
A combination of these limitations can mean that country characteristics affect the possibilities of risk transfer. Ke et al's study of risk allocation [#168] demonstrates this, in their comparison of risk allocation for projects in China, Greece, and the United Kingdom.