Conclusion 5

There is no comprehensive framework for considering risk allocation between the public and private sector when working in partnership. Risks should be borne by those who are best able to manage them and should be priced appropriately. Not all risks can or should be transferred to the private sector because the cost of inappropriate transfer of certain project risks to the private sector could be disproportionately high, as ultimately, the government may have to pick up those risks, including the completion of projects if the private sector partner fails or is unable to deliver to the requirement. The lack of guidance in quantifying risk as seen for PFI contracts helped to fuel some misalignment between the additional costs of PFI, private sector return on investment (which was considered 5 disproportionately high) and the actual level of risk incurred. The Treasury says that the benefit of private finance includes the incentive for more risk management within the private sector. However, we heard that sometimes there is a misplaced belief that risk transfer to the private sector equates to risk management by the private sector, and therefore there is a false assurance that the problem lies elsewhere. This is not always the case, as ultimately the government may need to step in if a major supplier of critical infrastructure were to fail, as was the case for Carillion. recommendation The Treasury should develop a specific infrastructure financing toolkit to support public bodies in quantifying, allocating, monitoring, and managing risks for infrastructure projects. This should include the consideration of contingencies for supplier failure.