Book contents
- Frontmatter
- Contents
- List of Figures
- Acknowledgments
- 1 Introduction
- 2 Project Selection and Preparation
- 3 Financing PPP and the Fundamentals of Project Finance
- 4 Allocation of Risk
- 5 The Contractual Structure
- 6 Project Implementation
- 7 Specific Characteristics of PPP in Different Sectors
- 8 Financial and Economic Crises
- Aggregate Key Messages for Policy Makers
- Glossary
- Selected Readings
- Index
4 - Allocation of Risk
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- List of Figures
- Acknowledgments
- 1 Introduction
- 2 Project Selection and Preparation
- 3 Financing PPP and the Fundamentals of Project Finance
- 4 Allocation of Risk
- 5 The Contractual Structure
- 6 Project Implementation
- 7 Specific Characteristics of PPP in Different Sectors
- 8 Financial and Economic Crises
- Aggregate Key Messages for Policy Makers
- Glossary
- Selected Readings
- Index
Summary
A successful project must benefit from workable, commercially viable, and cost-effective risk sharing. Given the differing interests and objectives of the parties involved, effective risk allocation will be an essential part of the drafting of the project documents and an integral part of the project's success. As discussed in Chapter 3, project finance lenders in particular are extremely sensitive to risk allocation and will look to see a contractual documentation that creates a “bankable” risk allocation.
Key Messages for Policy Makers
✓ Don't cram risk on the private sector. It usually is inefficient, expensive, and makes the project overly vulnerable to change and crises.
✓ Prepare for change during the project. It is not possible to anticipate or make every risk decision in advance; mechanisms will be needed to address change and other challenges.
Risk management based on efficiency is, of course, an ideal, a goal. In practice, risk tends to be allocated on the basis of commercial and negotiating strengths. The stronger party will allocate risk that it does not want to bear to the weaker party. This scenario does not necessarily provide the most effective and efficient risk management. Figure 4.1 shows this phenomenon from the government's perspective: allocating too much risk to the project company results in an expensive and unstable project; allocating too little risk results in a loss of value for money. Getting this balance right is notoriously difficult.
- Type
- Chapter
- Information
- Public-Private Partnership Projects in InfrastructureAn Essential Guide for Policy Makers, pp. 95 - 115Publisher: Cambridge University PressPrint publication year: 2011