Risk allocation is implicit in the revenue regime of the contract and in the scope of the obligations. The private party shall construct in the form and time defined (by the contract or as committed to in its proposal), and it shall provide the service as prescribed in the contract (the performance requirements). These will entitle the private partner to receive the foreseen revenue. Meeting these obligations and performing under these requirements (usually set out in specific target levels of service) is generally at the private partner’s risk and reward.

This subsection introduces a list of the most relevant risks as they are commonly identified in different guides and protocols (while acknowledging that there may be material differences in the classification of risks from some country practices to others).

Appendix A provides a deeper explanation of the risks, some subsets of risks, and further reflections on common practices and pitfalls regarding the allocation decision and its incorporation into the contract.

From the standpoint of contractual risk allocation (that is, the reflection of the risk allocation into the contract), there are different categories of risks.

Default Situation and General Rules

When allocating risks, the government should be clear that risk transfer is defined by the contract scope and the PPP contract structure. Subject to the refinement of risk allocation, all risks inherent to the scope of the contract, and those appropriate to the economic ownership of the asset and the nature of the business, should be transferred unless the risk assessment clearly recommends the opposite.

Many risks can be mitigated through appropriate action by the procuring authority during the Screening, Appraisal, and Structuring Phases of the project. This can be done by optimizing the scope of the project, the planning process, and through robust investigations that provide information about risks (and thus reduce uncertainty).

5.4.1 Quantitative Assessment and Appraisal

As noted, a quantitative assessment (estimating or defining values of the possible outcomes or “expected values”) is usually applied during appraisal for financial analysis and VfM. This is also referred as “adjusting values to risk”, and it is also necessary to conduct the CBA analysis.

The outcomes of the values may be presented or calculated in two different forms:

a) The most likely of possible outcomes.

The risk management process starts with the identification of risks. Identification of risks refers to defining a comprehensive list of risk events, usually grouped in consistent categories, and then describing them so as to understand clearly how those risks will impact the project outcome if they materialize. Processes for identifying risks are well established – see, for example, the International Organization for Standardization (ISO) 31000 Risk Management Standard.

An exact definition for risk is hard to find and its measurement is controversial as well. In literature, the word "risk" is used with many different meanings. The Oxford English Dictionary defines risk as "chance or possibility of danger, loss, injury, etc.”.

In the context of an infrastructure project, there are also different definitions issued or used by different agencies and institutions.

Risk allocation: definition and rationale

Risk allocation is the exercise to define which party will assume each risk, identifying which risks the private partner will be (or remain) responsible for and to what extent, and identifying which risks the public partner will be responsible for and to what extent[33].

Allocation of risk to the private partner is also referred to as “risk transfer”, and allocation to the public partner is also referred to as “retained risk”.