Risk Allocation Tool / Introduction
Tackling large infrastructure gaps remains a priority around the world and governments are increasingly looking to draw on the private sector through long-term public-private partnerships (PPPs) to help deliver major infrastructure projects, because they recognise that private sector involvement can drive innovation and efficiency and provide additional financing solutions.
The increased attention to PPP contracts means that governments need to take a longer-term approach to the identification, allocation and ongoing management of project risks, which is at the centre of every PPP transaction.
As part of its leading practices mandate, the GI Hub has developed an update to its PPP Risk Allocation Tool originally published in 2016. As was the case with the 2016 version, the new PPP Risk Allocation Tool 2019 Edition contains a set of annotated risk allocation matrices for PPP transactions addressing the risks and issues on a sector by sector basis.
The PPP Risk Allocation Tool 2019 Edition contains matrices showing the allocation of risks as between the public and private partners in typical PPP transactions for 18 different types of projects, including both economic infrastructure (such as transport, energy, telecommunications and water projects) and social infrastructure (such as school and hospital projects). For each sector, there is also an identification of key risk areas and a discussion of risk allocation trends.
Each matrix is accompanied by annotations, explaining the rationale for the allocations, mitigative measures and possible government support arrangements. The annotations also describe alternative arrangements for countries with differing levels of PPP market maturity.
A deep understanding of the risk allocation arrangements is a precondition to the drafting of every successful PPP contract. The appropriate application of risk allocation principles is what determines whether a PPP project will satisfy the needs of the government, achieve value for money and be financially viable for the private sector (i.e. whether investors will be willing to commit financial resources to the project).
The GI Hub engaged the global law firm Allen & Overy to prepare the updated guidance tool. Norton Rose Fulbright, another global law firm, prepared the initial 2016 edition, and this 2019 edition builds on that work.
The guidance tool is closely aligned with the World Bank Group’s Guidance on PPP Contractual Provisions 2019 Edition, which was also developed with the assistance of Allen & Overy.
Marie Lam-Frendo’s (Chief Executive Officer, Global Infrastructure Hub) quote:
With a close alignment to the G20’s focus on quality infrastructure and based on leading practices from around the world, the PPP Risk Allocation Tool provides important and practical information to governments looking to utilise PPP approaches to deliver the right outcomes for all parties. This tool complements nicely the existing PPP body of knowledge, and particularly the PPP Contractual Provisions report from the WB which was developed in close collaboration with the present tool.
Helga Van Peer’s (Head of Global Public Law Group, Allen & Overy) quote:
Robust and realistic risk allocation is vital for the long-term success of a PPP project. Allen & Overy is fully aligned with the mission of the Global Infrastructure Hub to build capacity to develop sustainable public-private partnerships. Built on global experience, these risk allocation tools support considered choices from the early onset of a PPP process and throughout negotiations to create value for all stakeholders. We aim for these tools to help unlock high impact infrastructure investment.