3.9  Quantifying risk

Value for money is achieved through the efficient transfer of risk to the private sector. Optimal risk management allocates risks to parties that are able to manage them.

These Guidelines recognise the importance of a sensible allocation of risks within an adequate risk management framework for the overall project. A commonsense approach is required to ensure that the PSC can be constructed in a timely and cost-effective manner.Figure 3-1 highlights the three main risk-pricing issues:

•  identification of material and quantifiable risk categories;

•  quantification of the consequence and probability of risk; and

•  approval of the intended risk allocation.

Figure 3-1  Valuing risk

In quantifying risk, the pricing framework and assumptions used must be defensible. The party responsible for a particular risk must be capable of managing it, subject to any statutory constraints and public interest considerations.