5.3  Risk allocation and the PSC

To reflect properly the costs of government delivery, a PSC should include both the value of those risks that would be retained by government under a PPP and those that would be transferred to the private party.  Pricing both of these risk categories can help to determine whether risks should be assumed by government, rather than government paying a higher price for their allocation to the private party.

For social infrastructure, the expected costs/benefits of risks should be included in the cash flows of the PSC.  To value risk, an estimate should be made of both the likelihood of the risk occurring and the dollar impact of the risk if it did eventuate.

For economic infrastructure projects, the construction of the PSC is developed on a project finance basis.  PSCs for economic infrastructure projects generally will incorporate the following principles:

•  commercial capital structure, for example a level of debt and equity that optimises the value of the project while maintaining an investment-grade credit rating for the project's debt.  Prudential constraints will be applied to the project's financial structure, including minimum debt service cover ratios and reserves for debt service;

•  debt guarantee, reflecting the margin between the project's credit rating and the AAA-rating of the Government; and

•  commercial level of return on the Government's equity investment in the project, reflecting the project and financial risks borne by equity throughout the project's life.