Transferring risk

A5.32 The responsibility for management of risk should be allocated to the organisation best placed to manage it whether in the public or private sector. The objective is optimal allocation of risk, not maximum transfer, and this is important to deliver Value for Money. Not all risks can be transferred.

A5.33 Successful risk transfer from the public sector to the private sector requires a clear understanding of risks, the likely impact they may have on the suppliers' incentives and financing costs and the limits of risk transfer which are possible. Commercial arrangements should reflect where the private sector has clear ownership, responsibility and control of certain risks it can manage more effectively.

A5.34 Public Private Partnership (PPP) arrangements may provide cost-effective and efficient risk management through risk transfer and sharing. Generally PPP schemes should transfer risks to the private sector when a supplier is better able to manage or influence the outcome. For example, the bundling of design, build and maintenance into a commercial agreement may affect the way they are planned, implemented and managed, and can lead to a higher quality outcome at the operational stage. Risks to be considered include:

  design and construction risk (to cost and/ or time)

  technology and obsolescence risks

  commissioning and operating risks (including maintenance)

  regulation and similar risks (including taxation, planning permission)

  demand (or volume/ usage), funding or income risks

  residual value risk

  project financing risk