Risk Allocation in Public-Private Partnerships: Maximizing value for money

The paper argues that while the principle of allocating risk to the party best able to manage it is widely accepted, generic application often erodes value for money. It suggests that practitioners should focus on managing both the occurrence and the impact of risks, utilize partial risk transfer to incentivize private sector mitigation, and avoid overly complex mechanisms that increase transaction costs. The author emphasizes that risk allocation must be customized to project characteristics and informed by the financial and legal structures of special purpose vehicles (SPVs) and market conditions.

• Optimal risk allocation is a primary driver of value for money (VFM) in PPPs; one cited study of 17 projects indicated that it accounted for 60 per cent of cost savings.
• While the general rule is to allocate risks to the party best able to manage them at the lowest cost, generic or standardized applications of this principle often undermine VFM.
• To maximize VFM, risk allocation should consider not only who can control the occurrence (frequency) of a risk but also who is best positioned to manage its impact (consequence severity).
• Implementing partial risk transfer—where the private party shares some financial consequences of 'compensation events' typically reserved for the public agency—can incentivize the private sector to pursue preventative mitigation and more cost-efficient solutions.
• Overly sophisticated risk allocation mechanisms can erode VFM by increasing transaction costs, particularly in social infrastructure where monitoring user-driven damage (e.g., vandalism vs. wear and tear) can be costly.
• The capacity of a private party to accept risk is constrained by its structure as a special purpose vehicle (SPV) and the willingness of subcontractors, insurers, and financiers to accept 'extraordinary' risks.
• Because 'unknown unknowns' inevitably occur over the long life of a project, risk allocation schemes should be flexible and based on general 'rules of the game' to ensure predictability.

APA

Hovy, P. (2015). Risk Allocation in Public-Private Partnerships: Maximizing value for money. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/risk-allocation-ppp-maximizing-value-for-money-discussion-paper.pdf

Chicago

Hovy, Pauline. Risk Allocation in Public-Private Partnerships: Maximizing value for money. International Institute for Sustainable Development, 2015. https://www.iisd.org/system/files/publications/risk-allocation-ppp-maximizing-value-for-money-discussion-paper.pdf.

Wikipedia

{{cite report |last1=Hovy |first1=Pauline |title=Risk Allocation in Public-Private Partnerships: Maximizing value for money |publisher=International Institute for Sustainable Development |date=August 2015 |url=https://www.iisd.org/system/files/publications/risk-allocation-ppp-maximizing-value-for-money-discussion-paper.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{hovy2015risk, author = {Hovy, Pauline}, title = {{Risk Allocation in Public-Private Partnerships: Maximizing value for money}}, institution = {International Institute for Sustainable Development}, year = {2015}, month = aug, url = {https://www.iisd.org/system/files/publications/risk-allocation-ppp-maximizing-value-for-money-discussion-paper.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }