25. One main PPP benefit is the transfer of certain risks to the private sector counterparty. Fixed-price, fixed-date construction contracts mean that the public authority should not face the risk of over-budget construction costs or the financial costs of delays5. Many PPPs will also contain liquidated damages clauses whereby the private party will pay pre-determined damages to the public authority if the infrastructure is not available for use as of the contracted date. These damages are often substantial and may accrue on a daily basis creating a meaningful incentive to complete the facility on time.
26. All contractual relationships are essentially a method to assign risks between contracting parties. A core principle for a successful PPP is that each risk should be allocated to the party that is best able to manage or mitigate that risk - the party that has the greatest influence over the probability that the event occurs, or if the risk event does occur, has the ability to mitigate its impact at lowest cost (OECD, 2008).
27. Risks can be thought of as either endogenous (internal) risks or exogenous (external) risks. Endogenous risks can be controlled unlike exogenous risks, so it is the allocation of endogenous risks that should be the focus in PPPs. Problems can arise should a government require that the private partner carry some exogenous risk. Given that the risk is exogenous, the government will not be getting better risk management from the private partner than it would by carrying the risk itself and the private partner will require a premium for facing these risks that it cannot control (OECD, 2008).
28. Some risk allocations seem obvious: for example, the allocation of construction risk to the developer, as it is the developer that will actually engage in construction: and the allocation of change-in-law risk to the government as any change in law will most likely be initiated by the government. However, other risk allocations are less obvious. Some of these issues will be further considered below.
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5 . It must be noted that re-negotiations to increase project timelines and budget are not uncommon in PPPs. OECD research suggests that re-negotiations may occur in up to 30% of contracts rising to approximately 54% in the transport sector. This emphasises the requirement for flexibility in contracts to accommodate changed and unforeseen circumstances and the need for the public sector to have the capacity to re-negotiate on an equal footing with the private party. Source: OECD (forthcoming), Fostering Investment in Infrastructure. Lessons Learned from OECD Investment Policy Reviews.