Risk - a critical focus of PPP design

"Risk is the chance of an event occurring which would cause actual project circumstances to differ from those assumed when forecasting project benefits and costs”

– Risk Management & Contractual Issues, Partnerships Victoria

Allocating risk to achieve added efficiency is what makes PPP a potentially powerful way of reducing project-related costs and achieving improved value for money for the public sector. The level of risk can be changed by allocating responsibility for individual risks to those who are best able to manage them.

The parties involved in a project can affect the amount of risk by:

The level of influence they have over events, and
Tthe level of information they have about the present and the future.

Influence relates to the power parties have to create action and determine outcomes. Influence can come from delegated authority, for example where a public authority has certain powers granted to it under law, from good management and organisation, and from specific knowledge.

Information is directly related to risk. It is precisely because we usually don’t have all the information that we can’t predict future outcomes for certain. When we have better information we are better able to foresee and reduce risk.

The public and private sectors are different in the types of influence and information that they have. This means they can control risks in different ways from each other and they are better at controlling some risks and not as good at controlling others.

For example

The public sector has certain powers and advantages in the process of land acquisition that mean it is sometimes better suited to this task and taking the associated risks.

By contrast, the private sector is exposed to competitive pressures that force it to establish improved management practices. It is also often the technology leader. This means it may be better suited to managing the design and construction risks.

On their own both the public and private sectors are weaker in their ability to control certain risks. One of the goals of a well-designed PPP is to pick out the strengths and combine them together. The result should be that a partnership of public and private parties is stronger and more efficient than either party by itself.

There is usually concern about downside risk: the risk that something will go wrong. This is because of a focus on costs. Costs are very important to any person or any organisation that has responsibility for the use of resources, both in the public sector and in the private sector. However, there are also upside risks, created because outcomes can be better than expected.

Next Page: Major risks in infrastructure PPPs