Risk Allocation in Public-Private Partnerships: Maximizing value for money

Optimal risk allocation is one of the key value for money (VFM) drivers in a public-private partnership (PPP) delivery model. In a conventional delivery model, most long-term risks are borne by the public agency.

A PPP model, on the other hand, allows the public agency to transfer risks to the private party, relieving it of bearing the cost of risks that it cannot manage—such as cost overruns during the construction phase, construction delays and long-term maintenance of the asset. For the public agency, efficient risk allocation is, therefore, key to creating a “good deal” for society. For the private party, efficient risk allocation is key to ensuring that the project is financeable and has an attractive risk-return ratio. Allocating risks in PPPs, however, is inherently challenging. Risk transfer to the private sector comes at a price, and transferring risks that the public agency is better able to manage is likely to erode VFM. In addition, project risks expected to occur 30 or 40 years into the future cannot be predicted with certainty, because risks are dynamic and change throughout the life of the project. This paper will aim to offer some guiding principles to improve the effectiveness of risk allocation and maximize VFM from a PPP deal.

This paper was funded by the Danish International Development Agency (DANIDA).