On big infrastructure projects, every major risk should be identified and then allocated to the party that is best able to manage and cost it. To understand a risk, calculations are done to understand the likelihood of a risk happening, as well as its likely outcome.

For example, in assessing the risk of a flood on a building site, we could look at three scenarios: 1. ‘The best case’ - the flood may wash away some earth and shut the site for a day; 2. ‘A moderate case’ - the site loses access for a week; and 3. ‘The worst case’ - the building’s foundations are washed away. In this kind of analysis, assumptions are made about how risk can be managed and mitigated.

Taking the example of site flooding further, potential mitigations could be to store materials in areas that have better drainage. In that case, the person who is best placed to manage the risk would be the site contractor that has knowledge of the site and has responsibility for the materials. In theory, the contractor would also be able to charge a lower cost for managing the risk.  

Much of the criticism of the way Aotearoa New Zealand has run PPPs to-date centres on the Government pushing too much risk onto project consortia, who then pushed it down to contractors and subcontractors.

One might ask, for instance, is it reasonable to expect contractors to shoulder the risk of project consents being delayed? These are issued by local and regional governments and, in many cases, are out of a contractors' control.

The unintended consequences of pushing too much risk onto the private sector can be outright lack of interest, or higher prices being quoted that reflect the cost of the risk transfer. That’s not good for NZ Inc, where the cost of infrastructure is already at record highs.

Radio New Zealand has highlighted that in the education sector risk burden is a key reason companies that could build and operate schools under a PPP model are now disinterested.

As the buyer of all large infrastructure projects, the Government may want to carefully consider where ultimate responsibility for different risks will lie. Some risks may (or may not) sit with the private sector. If they do, it's worth asking can the party manage and price the risk effectively?

It should also be asked - is it in the country’s best interests for a high cost / low likelihood risk to be transferred? In some situations, it may be better for the public sector to hold that risk. This would lower the PPP bid price and they can then either insure or manage the risk themselves. 

In Aotearoa's previous rounds of PPPs, the same standard agreement with only minor adjustments was applied across different asset classes, including prisons, schools, and roads. This was a mistake. Flexibility is crucial. Each project should have a tailored procurement approach and adaptable procurement model.

‘Progressive PPPs’, a model developed in North America, are another way of being smarter around risk allocation. These feature an early collaborative stage (similar to the Early Contractor Involvement (ECI) model used in Aotearoa) – where the private partner is engaged early in the project based on their qualifications and experience, rather than price.

Progressive PPPs let private partners provide input earlier in the project development process, addressing issues like route alignment (in horizontal projects such as roads), consentability, and the availability of materials. The process is iterative and collaborative, which leads to a more informed understanding of risks before converting into a fixed-price PPP contract.

Making sufficient preliminary site investigations and reports available to private sector bidders is another part of the solution. If the Government wants to run competitive PPP bids, providing information in advance about known risks in a form that bidders can rely on will help better price in risk.

Exploring shared risk

The purist view of PPP risk allocation is often very black and white. It either sits with the public sector, or the private sector. But there’s a third way – shared risk.

A nice example can be found with the Tłı̨chǫ Highway - a 100-kilometre all-weather gravel road in northern Canada connecting a remote First Nations community to the Yellowknife Highway.

Built on permafrost, the ground stays frozen year-round. Building on either permafrost or non-permafrost ground is relatively straightforward but designing for potential climate change impacts on a permafrost road proved tricky.

The Government of the Northwest Territories (GNWT) in Canada wanted a fixed-price contract for designing, building, and maintaining the road for 25 years, but factoring in climate change risk made it expensive.

A risk-sharing plan was created. The private sector partner designed for likely, scientifically modelled climate outcomes. Opened in 2021, if the climate outcomes turn out worse than modelled, they'll cover extra costs up to a limit, with GNWT covering the rest. This way, the private partner had an incentive to manage risks without overpricing for worst-case scenarios.

Success is about smart risk management, not wild risk taking. That’s true of infrastructure PPPs, and it's true of life. For Aotearoa, getting the best out of PPPs means moving past highly standardised contracts and adopting flexible risk allocation practices that will, in the long run, benefit the country and its critical infrastructure needs.