A successful project must benefit from workable, commercially viable, and cost-effective risk sharing. Given the differing interests and objectives of the parties involved, effective risk allocation will be an essential part of the drafting of the project documents and an integral part of the project's success. As discussed in Chapter 3, project finance lenders in particular are extremely sensitive to risk allocation and will look to see a contractual documentation that creates a “bankable” risk allocation.

Risk management based on efficiency is, of course, an ideal, a goal. In practice, risk tends to be allocated on the basis of commercial and negotiating strengths. The stronger party will allocate risk that it does not want to bear to the weaker party. This scenario does not necessarily provide the most effective and efficient risk management. Figure 4.1 shows this phenomenon from the government's perspective: allocating too much risk to the project company results in an expensive and unstable project; allocating too little risk results in a loss of value for money. Getting this balance right is notoriously difficult.