46. In the course of ISMED Programme work, government officials have sometimes stated that they wish to pursue PPPs so that the state can avoid all risk by transferring risk entirely to the private sector. When combined with notions discussed above that a concession arrangement is cost free and will provide net revenue, PPPs can be seen as very attractive. But just as the idea that PPPs are cost-free is false, so is the idea that all risk can be transferred.
47. One benefit of PPPs is allowing a state to transfer certain risks to the private party. But not all risks can or should be transferred. As previously discussed, risks should be assigned to the entity best able to control or mitigate them, meaning the party for which it costs the least to prevent the risk or deal with the consequence (OECD, 2012). Therefore, the risks that should be transferred to the private partner are those risks that are endogenous to the private partner, those that they can control. Examples are construction risk and the risk associated with coordinating a number of building trades and subcontractors. Almost all PPPs transfer these risks to the private partner.
48. It makes no sense for the government to attempt to make the private partner responsible for risks that are exogenous to the private partner and endogenous to the government. Examples include change of law and obtaining certain permits and authorisations from government entities. As these risks are beyond the control of the private partner, but firmly within the control of the public partner, it is unlikely that the private partner will agree to take them. If it does, it will price its bid to reflect its lack of control over their occurrence. Ultimately, it will be less costly for the state to retain the risk and avoid paying that premium.
49. Risks that are exogenous to both parties are the most difficult to allocate. Examples include force majeure and to some degree geological or archaeological risks. As these risks are beyond the control of either party, the question becomes which party can mitigate their occurrence at lowest cost. This is almost always the government with its taxing power, lower funding costs and (usually) control over a currency and not a project company that has been capitalised and constituted to the minimum extent necessary to carry out the project. Allocating these risks to the private party will once again simply result in more expensive bids and/or few bidders.
50. As previously mentioned the allocation of volume or traffic risk is particularly difficult as it is not always within the control of either the private sector or public sector. Volume will be affected by the quality of private operator services and by pricing or tariff levels, which may or may not be set by the private operator. On the other hand, the government may have many levers at its disposal to influence demand, including building alternatives to the asset in question and a multitude of fiscal and economic policy actions. There are also numerous factors beyond the control of government or the private sector that may play a part, such as global economic conditions and the weather. Given this uncertainty the private sector party will usually be unwilling to take traffic risk unless it can be assessed and estimated with a high level of confidence. Where the private sector does take this risk the bid will be priced accordingly.