Risk Management in Private Finance Initiative (PFI) Road Projects: a Road Case in the UK

Construction is a complex and dynamic industry; and the main procurement parameters are time, cost, quality and certainty. A managed approach to risk is a means for providing the client with fewer surprises and greater certainty. Central to all PFI transactions are the contractual agreements put in place between the parties and these define each party’s roles making clear their expected requirements and liabilities. The contractual agreements define the apportionment of risk between the contractual parties. The incorporation of a risk register with identified risk owners as an addendum to the contracts clarifies the liabilities and responsibilities of the parties. The fundamental principle of a PFI project is that risks associated with the implementation and delivery of services should be allocated to the party that is best able to manage the risk. In a PFI concession, the Government’s view has been that it is reasonable to expect the project consortium (SPV) to take on systematic risk. Systematic risks can be classified as economic risk, legislative risk, taxation risk and financial arrangements. The financing arrangement risk crosses the boundary between construction and operation and may persist for the life of the contract and beyond; although there has been a tendency for re-financing early in the concession period. The Consortium Company (SPV) has separate contracts for the Construction Contractors and for the Operation and Maintenance Contractors and may have Services Contracts. The reason for this is to permit further transfer of risks to the party which has the ability to manage that risk. This paper will examine risk with the acronym so-called SLEEPT methodology, including social, legal, economic, environmental, political and technological aspects within the domain of a PFI road project in the UK.