A guiding principle of PFI is that risk in PFI projects should be allocated to whoever is best able to manage it. With financially free-standing projects most risk must be assumed by the private sector as the public sector will (generally) be at arm’s length from the project and therefore unable to manage the risks. This principle is, however, difficult to apply in all circumstances.

For example, the success of the Sydney Airport Rail Link depends not only on how the private sector operator does its job but also on factors over which it has little or no control, such as on-time running of CityRail services, the provision (or non-provision) of luggage racks on trains, access to and promotion of the Rail Link at CityRail stations, and signage to assist people find the right platform for the train. These might seem like minor issues but they have had a major bearing on patronage of the link since it was completed.

When the British Eurostar train service was privatised in 1999 the private sector overestimated passenger numbers by a factor of two to three times, then were unable to obtain the billions of pounds of financing they required from the City. The operators asked the government to lend the money to them, transferring the risk back to the taxpayer. Ultimately the government effectively agreed to provide the funds by way of guarantee. “It was a mistake for the government to think they could fully transfer the business risk to the private sector,” says Phil Airey, Audit Manager of the National Audit Office.⁹  

General risks to consider with PFI projects include: design and construction time, operating costs, demand, residual value, obsolescence, tax-ation, planning permiss-ion and financing risk. One other issue that must be considered is the financial viability of the bidder. This can be overcome by bringing another company into the picture. For example, a construction company that was building prisons was financially shaky. The government managed its risk by involving another company in the project. This ensured that if the first company went broke the project would be completed.

A good PFI deal will transfer risk from the public to the private sector. The private sector in turn may wish to transfer its risk to another party, either through insurance or through transferring the operational risk to another party under contract.¹⁰

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