5. Risk Allocation and Structuring[32]

BOX 5.14: Clarifications regarding the Scope of the Risk Concept assumed in this Chapter

Risk from a financial perspective

This chapter deals with risk matters from a financial perspective. As such, it is centred on risks affecting the infrastructure asset and the economic business related to its management. It deals with how to allocate those risks within the contract in an efficient manner.

Governments care not only about financial implications but also more broadly about “the delivery of service or with the delivery of a beneficial outcome in the public interest” (HM Treasury, The Orange Book: Management of Risk - Principles and Concepts, 2004).

Consequently, the public sector may have a higher tolerance for certain (financial) risks while it is exposed to other uncertainties and risks during the life of the project cycle (for example, reputational risk, fiscal risk/aggregated affordability, and under performance of the private partner, or poor quality of the service not duly compensated for by penalties or payment abatements). Managing risks from the public standpoint will therefore include other issues and strategies (for example, public perception and communication) which also lie at the heart of the outcomes of the project as a public objective, and further relate to programs and also policies (for example, the fiscal sustainability of a program).

A broader explanation of risk management by governments and authorities may be found in the UK’s HM Treasury: “Management of Risk: A Strategic Overview” (The “Orange Book”) and the UK National Audit Office (NAO): Supporting Innovation: Managing Risk in Government Departments. Guidebook for Risk Assessment in Public Private Partnerships. The US Department of Transportation’s Guidebook for Risk Assessment in Public Private Partnerships (2013) also provides a sound explanation of risk management in the context of transportation PPPs. An in-depth coverage of appraisal and preparation matters from a PPP project standpoint is given in chapter 4, and the relevance of sound frameworks for the overall governance of PPP strategy is covered in chapter 2.