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Table 2

Critical risk factors and risk allocation between government and private partners

Critical risk factorDescriptionAllocation of risk factor
Political risk Interference with project designs, award of contracts, procurement of goods and services, biased selection of project sites, and arbitrary termination of PPP agreements Government can control this risk through the proper definition of roles and responsibilities 
Financing risk Difficulty in raising funds for the project This risk can be shared by the government and private sector through the pooling of resources 
Government credit risk Failure to honor credit guarantees This should be borne wholly by the government to ensure that they uphold their pledge of providing credit guarantees 
Inflation risk Fall in the exchange value of the local currency, fall in effective demand for PPP services The private sector needs to make accurate calculations about the inflation rate and take the risks arising from the inconsistency between the actual and the forecasted rates 
Inaccurate market forecast risk Substandard decision-making procedures, lack of PPP project operational experience and capacity, inadequate preparations, unequal information-sharing among project partners The risk of decision-making error should be shared by both sides and adequate market investigation and analysis could control this risk 
Product price risk Undervalued prices which may decrease expected profits and reduce the competitiveness of PPP projects, or outrageous prices which could cause chaos and affect the use of the services provided through such projects This risk should be shared and can be minimized through a detailed feasibility study by both parties 
Technical risk Failure or below-expectation performance of the technology adopted for the production, transmission, storage, and distribution of piped water This risk should be borne by the private partner since they have more competence to control it than the government 
Contract risk Potential changes in the social, political, and economic environment may not be anticipated in contract documents. It also includes ambiguities, inconsistencies, and errors in contract documents By the fault rule, this risk should be borne by the party who makes the mistake or fails to perform assigned obligation 
Legal risk Absence of a robust and dedicated legal system to handle PPP contracts and related cases The government has the power to establish and modify laws and thus has a strong ability to control and sustain the legal risk 
Market demand risk The demand and use of the services provided through a PPP project The government and the private sector share the market risk 
Lack of supporting infrastructure risk The conditions and facilities which are external to the PPP project but basic to their optimum performance This risk should be borne by the government and the private sector that needs to transfer this risk to the government through a ‘take-or-pay’ agreement so as to ensure project returns 
Critical risk factorDescriptionAllocation of risk factor
Political risk Interference with project designs, award of contracts, procurement of goods and services, biased selection of project sites, and arbitrary termination of PPP agreements Government can control this risk through the proper definition of roles and responsibilities 
Financing risk Difficulty in raising funds for the project This risk can be shared by the government and private sector through the pooling of resources 
Government credit risk Failure to honor credit guarantees This should be borne wholly by the government to ensure that they uphold their pledge of providing credit guarantees 
Inflation risk Fall in the exchange value of the local currency, fall in effective demand for PPP services The private sector needs to make accurate calculations about the inflation rate and take the risks arising from the inconsistency between the actual and the forecasted rates 
Inaccurate market forecast risk Substandard decision-making procedures, lack of PPP project operational experience and capacity, inadequate preparations, unequal information-sharing among project partners The risk of decision-making error should be shared by both sides and adequate market investigation and analysis could control this risk 
Product price risk Undervalued prices which may decrease expected profits and reduce the competitiveness of PPP projects, or outrageous prices which could cause chaos and affect the use of the services provided through such projects This risk should be shared and can be minimized through a detailed feasibility study by both parties 
Technical risk Failure or below-expectation performance of the technology adopted for the production, transmission, storage, and distribution of piped water This risk should be borne by the private partner since they have more competence to control it than the government 
Contract risk Potential changes in the social, political, and economic environment may not be anticipated in contract documents. It also includes ambiguities, inconsistencies, and errors in contract documents By the fault rule, this risk should be borne by the party who makes the mistake or fails to perform assigned obligation 
Legal risk Absence of a robust and dedicated legal system to handle PPP contracts and related cases The government has the power to establish and modify laws and thus has a strong ability to control and sustain the legal risk 
Market demand risk The demand and use of the services provided through a PPP project The government and the private sector share the market risk 
Lack of supporting infrastructure risk The conditions and facilities which are external to the PPP project but basic to their optimum performance This risk should be borne by the government and the private sector that needs to transfer this risk to the government through a ‘take-or-pay’ agreement so as to ensure project returns 

Source: Adapted from Xu et al. (2011).

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