The underlying principle of a PPP arrangement is that the risks associated with carrying out a PPP Project are allocated to the Party best able to manage - or most incentivized to bear - them. This involves identifying which Party is best able to manage the likelihood that such risks will occur, as well as to manage the impact if they do actually occur. In assessing the likely cost impact, the Parties will look at each other's ability to bear such cost and the related impact on price, as well as whether and how the cost impact could be offset or passed on (e.g. via insurance, increasing the price of the service to the end user (e.g. in a toll road) and/or by spreading the cost across tax payers).8 As mentioned in Section E. above Lenders will be closely involved in this analysis and the procurement process should be designed so that Lenders' bankability issues are required to be reflected in bid proposals (potentially resulting in modification of the terms), so that these can be evaluated by the Contracting Authority during the competitive process and prior to signing the PPP Contract.
If risks are carefully assessed and transferred to the Party best able to control or mitigate them, this should result in a reduction of overall PPP Project cost and thereby improve value for money for the Contracting Authority. Contracting Authorities should therefore consider retaining those risks that are not conducive to pricing or assessment by a Private Partner and which the Contracting Authority is best placed to manage. By doing so, the Contracting Authority avoids having to pay the risk premium that will be charged by the Private Partner if it is required to assume such risks.
Most importantly, the Parties should strive to achieve a balanced and reasonable risk allocation in the PPP arrangements that will provide an appropriate basis for a long term partnership. This is key because in order to deliver value-for-money, most PPP Contracts need to run for a significant period of time, typically between 15 and 30 years. Because of their long-term and usually complex nature, PPP Contracts cannot specifically provide for the entire range of events that might potentially arise during their lifetime. All stakeholders in a PPP Project will need comfort that situations which are beyond their immediate control and which affect contractual performance will be dealt with in a way that allows them to arrive at a mutually acceptable solution. Reducing uncertainty should also ensure greater value-for-money is achieved as uncertainty typically attracts a risk premium (i.e. the Private Partner will expect a higher price/return). As a result, PPP Contracts need to have flexibility built in to enable changing circumstances to be dealt with as far as possible within an agreed contractual framework.
As risk allocation is achieved primarily through the contractual structure, it is essential for a Contracting Authority to understand not only how the PPP Contract works, but also its relationship with the related Project Agreements and any other documents to which the Contracting Authority is party (such as the Lenders' Direct Agreement - see Section 6, Lenders' Step-in Rights), or which affect its obligations and liabilities (such as the Private Partner's debt and equity finance documents). As regards the PPP Contract itself, the interplay between the contractual provisions is so carefully balanced that they cannot be considered in isolation of each other - the PPP Contract must be looked at in its entirety.
It is important to note that risk allocation is influenced by various factors, including the maturity of the market, the experience of the participants and the level of competition between bidders. Emerging market governments and Contracting Authorities may therefore be able to transfer more risk to Private Partners once they establish successful track records in national/sectoral PPP markets, as these markets become increasingly attractive to Equity Investors and Lenders, and therefore more competitive.
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8 For further insight into how and why risks are allocated to particular Parties, see the Risk Matrices in the Global Infrastructure Hub Report: Allocating Risks in Public-Private Partnership Contracts, 2016 edition. See link in Appendix, Additional PPP Resources.