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The Global Infrastructure Hub Ltd (GI Hub), has a G20 mandate to grow the global pipeline of quality,

bankable infrastructure projects.

By facilitating knowledge sharing, highlighting reform opportunities and connecting the public and private sectors, our ambitious goal is to increase the flow and
quality of private and public infrastructure investment opportunities in G20 and non-G20 countries.

The GI Hub has been established in Sydney, NSW, Australia, as an independent not-for-profit company under Australian law.

Hardcopy ISBN: 978-0-9946284-1-1

Online ISBN: 978-0-9946284-0-4

Ownership of intellectual property rights in this publication

Unless otherwise noted, copyright (and any other intellectual property rights, if any) in this publication is owned by the Global Infrastructure Hub.

© Global Infrastructure Hub Ltd ACN 602 505 064 ABN 46 602 505 064. Published 2016.

Disclaimer

The material contained in this publication is made available on the understanding that the GI Hub is not providing professional advice, and that users exercise
their own skill and care with respect to its use, and seek independent advice if necessary. The GI Hub makes no representations or warranties as to the contents
or accuracy of the information contained in this publication. To the extent permitted by law, the GI Hub disclaims liability to any person or organisation in
respect of anything done, or omitted to be done, in reliance upon information contained in this publication.

The risk matrices presented in this publication are sample documents, for reference purposes only, and they should not be used as "models". Legal and
technical advice should be sought to develop an appropriate risk matrix for any given project, designed to fit the circumstances of that project.

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Contents
Overview 2
Scope and Terminology 4
Transport Sector 15
Risk Matrix 1: Toll road (DBFO) 15
Risk Matrix 2: Airport (DBFO) 35
Risk Matrix 3: Light rail (DBFOM) 64
Risk Matrix 4: Heavy rail (ROT) 86
Risk Matrix 5: Port (DBFO) 102
Energy Sector 123
Risk Matrix 6: Solar PV (BOO) 123
Risk Matrix 7: Hydro power (BOOT) 143
Risk Matrix 8: Power transmission (BOOT) 160
Risk Matrix 9: Natural gas distribution (ROT) 178
Water and Sanitation Sector 204
Risk Matrix 10: Water desalination (BOOT) 204
Risk Matrix 11: Water distribution (ROT) 229
Risk Matrix 12: Solid waste collection, disposal, landfill and recycling (DBFO) 254
Overview
2

Overview
The Global Infrastructure Hub (GI Hub), based in Sydney, Australia, is an organisation established by the G20 group of nations to foster innovative approaches to global
infrastructure development. One of the GI Hub’s key mandates is to promote ‘leading practices’ for quality infrastructure investments, including the preparation and
dissemination of guidance materials in respect of project identification, preparation and procurement.
As part of its ‘leading practices’ mandate, the GI Hub is developing a set of annotated risk allocation matrices for public-private partnership (PPP) transactions, in a
variety of sectors. Risk allocation is at the centre of every PPP transaction, and a deep understanding of the risk allocation arrangements is a precondition to the drafting
of every PPP agreement. The appropriate application of risk allocation principles is what determines whether a given PPP project will be ‘bankable’ (i.e. financeable), and
whether it will be long-lasting (i.e. able to remain viable though to the end of a long-term contract).
The GI Hub has engaged Norton Rose Fulbright, a global law firm, to prepare a report on Allocating Risks in Public-Private Partnership (PPP) Contracts, 2016 Edition
(the Report), with matrices showing the allocation of risks as between the public and private sectors in typical PPP transactions, along with related information on
mitigative measures and typical Government support arrangements. Separate matrices are developed for 12 designated types of projects within the transport, energy and
water and sanitation sectors. The 12 projects are:
7. a new large-scale (greater than 100 MW) hydroelectric power project,
Transport sector: developed as a Build-Own-Operate-Transfer (BOOT) transaction, where the
1. a new toll road project, developed as a Design, Build, Finance and Operate power is being sold to a state-owned single buyer
(DBFO) transaction
8. new power transmission project, developed as a BOOT transaction
2. a new airport project, developed as a DBFO transaction
9. a natural gas distribution project involving an existing distribution for an existing
3. a new municipal light rail project, developed as a DBFO transaction utility, developed as a ROT transaction, in a situation where the wholesale
supplier of natural gas is a state-owned entity and where natural gas tariffs are
4. an intercity railway project involving an existing railway, developed as a
set by a regulator
Rehabilitate-Operate-Transfer (ROT) transaction
5. a container terminal port project, developed as a DBFO transaction Water and sanitation sector:
10. a new water desalination project, developed as a BOOT transaction, where the
Energy sector:
desalinated water is being sold to a state-owned single buyer
6. a new photovoltaic power generation project, developed as a Build-Own-
11. a water distribution project involving an existing distribution for an existing
Operate (BOO) transaction, where the power is being sold to a state-owned
utility, developed as a ROT transaction, in a situation where the wholesale
single buyer
3

supplier of water is a state-owned entity and where water tariffs are set under Two workshops were held, in Singapore in April 2016 and in Paris in May 2016, to
the terms of the Concession Agreement garner feedback on draft versions of the Report. Feedback was also sought more
broadly from those working in the industry. Suggestions made have been
12. a solid waste collection, disposal, landfill and recycling project, developed as a considered, and where appropriate, have been incorporated into the Report.
BOT transaction For current purposes the Report is being presented in a hard copy tabular/matrix
Each matrix is accompanied by annotations, explaining the rationale for the format and it is acknowledged that this format creates an element of overlap and
allocations, mitigative measures, any Government support arrangements, and repetition in presentation. A more interactive, user-friendly version of the Report
describing alternative measures for countries with differing levels of PPP market will be made available online in an interactive website to be hosted by the GI Hub.
maturity. Electronic database functionality is considered important because this will allow
the reader to investigate the data; to find and filter relevant project and market
The Report has been prepared based on the collective global experience of over
profiles and then export this information as required.
20 senior lawyers from Norton Rose Fulbright. These lawyers have extensive
experience advising project grantors and regulators, sponsors, proponents and We trust that you will find the Report useful.
contractors in established and emerging markets on a wide range of projects and
they have a deep understanding of the material risk allocation issues that make the
difference between a project being bankable or not. Norton Rose Fulbright’s
practice encompasses PPP transactions in the most advanced economies of the
world such as Australia, Germany, the US, Canada and UK, along with many of
the emerging markets such as Colombia, Nigeria, Tanzania and Indonesia.
However, the diversity of experience and regional differences make it inherently
difficult to suggest ‘one size fits all’. The annotations in the Report reflect positions Nick Merritt Simon Currie Mark Moseley
reached in projects that have closed and the solution found in one project may not Global Head of Global Head of Energy Senior Director, Legal
necessarily be right for another. Infrastructure, Mining Norton Rose Fulbright Frameworks and
and Commodities Procurement Policies
The Report reviews trends and displays a risk outline for each sector. The Report Norton Rose Fulbright Global Infrastructure Hub
is also aligned with the ongoing work of the World Bank Group (WBG) on the WBG
Recommended PPP Contractual Provisions initiative for 2016.
4

Scope and Terminology


Scope and objective of the Report
The selection of the sectors and projects is reflective of the outlook of the GI Hub.
That is, the focus of the Report has been based on economic infrastructure, as
opposed to social infrastructure, such as education and health related projects.
The risks identified in Report focus on the risks that can be legislated, allocated
and mitigated between the public and private sectors and are risks addressed
primarily through the concession or project agreement. Therefore risks such as
Government procurement risk, private sector financial and performance risk, third
party intervention/delay and specific risks arising in unsolicited projects, are
outside the scope of this Report.
The objective of this Report is to provide additional guidance to countries, including
both members and non-members of the G20, that wish to develop a programme of
PPP transactions. The primary focus is on those countries with limited or no prior
experience of PPPs, and the desired outcome of the Report is that those countries
will have a useful reference guide to assist with their understanding of typical PPP
risk allocation arrangements. It is hoped that this ‘upstream’ work will, in turn,
assist in the development of a pipeline of robust PPP projects.
Please also refer to WBG Recommended PPP Contractual Provisions initiative for
2016 for further information on the contractual risks in PPP projects. A copy of the
2015 edition of the WBG Report on Recommended PPP Contractual Provisions
can be found at http://ppp.worldbank.org/public-private-
partnership/library/wbgreport-recommended-ppp-contractual-provisions.
5

Common and civil law distinctions


the UK and other common law jurisdictions when developing, negotiating and
Although the UK and certain other Commonwealth countries have been at the
implementing complex PPP risk allocation structures. This trend has been
forefront of the legal and contractual development of PPP projects in the past 25
facilitated by the various sponsors, construction companies, lenders and
years, civil law countries (such as France) have long had a tradition of transferring
professional advisers that were involved in the earlier projects and have since
to the private sector, in particular through the use of end users pay concessions
sought to apply similar matrices and practices to civil law projects.
(but also through public works and services procurement contracts), some of the
risks associated with the construction or operation of public infrastructure such as
As a consequence some civil law countries have had to pass specific laws to
rail, bridges, roads, water or power utilities. Whether based on user or Government
permit the introduction of contractual arrangements developed in the UK (and
pay models, to the extent that these arrangements seek to allocate risks between
other markets) as they did not fit existing administrative law structures.
private and public parties they could be described as falling, more or less
depending on the degree of cooperation between the parties, under the very At a more practical level (i) the introduction of UK and common law inspired PPP
generic term of ‘PPP’ contracts. practices, (ii) the use of common law precedents as a starting point for the drafting
of PPP contracts in civil law countries and (iii) the larger number of international
Where such civil law PPP contracts differ from common law contracts is that they
participants who feel more comfortable with detailed provisions rather than general
generally are governed by administrative law which, besides giving jurisdiction to
clauses requiring further analysis of underlying local laws have resulted in longer
specific administrative courts, include a number of fundamental principles which
and more detailed contracts than would be traditionally the case in civil countries.
protect the public interest and which the parties cannot always easily contract out
of. These principles may include, for instance, the right of the public party to It seems that the same trend has occurred in terms of risk allocation: whilst some
unilaterally cancel or amend the contract in the public interest, (the private party jurisdictions’ mandatory laws might interfere with the risk allocation (e.g. a
being entitled to compensation), or the right of the private party to obtain provision excluding compensation for a private party expropriated for its own
compensation if there is an unexpected and exceptional increase in the costs of default may entitle such party to an unjust enrichment claim), on the whole there is
performing the contract due to unforeseen economic circumstances. no significant difference in the allocation of risk between civil and common law
jurisdictions.
Notwithstanding such differences since many of the technical, commercial and
financial risks that PPPs seek to address tend to be similar worldwide, many civil Accordingly it seems that the differences between common law and civil law do not
law countries have sought to benefit from the more recent experience gained by play a significant role when it comes to general risk allocation. In this context, an
6

individual country’s background and political objectives are probably more


important.

So whilst each individual country will have its own way of documenting general risk
allocation, the risk matrices in the Report even those based on projects developed
in common law countries will be of useful application when considering a similar
PPP in a civil law jurisdiction.

SIN-#7991991-v10
7

Glossary
Availability based projects Projects which entitle a Private Partner to receive regular payments from a public sector client to the extent that the project asset is
available for use in accordance with contractually agreed service levels.
Build-Own-Operate / BOO The project structure whereby the Private Partner builds the asset in question, has full ownership of the asset and maintains the
responsibility of operating the asset.
Build-Own-Operate-Transfer / The project structure whereby the Private Partner builds the asset in question, has full ownership of the asset, maintains the
BOOT responsibility of operating the asset and then transfers the asset back to the Contracting Authority after a specified period of time
(typically somewhere between 25 and 30 years in the transport sector and 15 and 25 years for energy and waste/water). The
Contracting Authority should carefully consider the quality of the asset it expects to receive back at the end of the term and how to
ensure that the Private Partner ensures that the asset achieves that standard.
Build-Operate-Transfer / BOT The project structure whereby the Private Partner builds the asset in question, maintains the responsibility of operating the asset
and then transfers the asset back to the Contracting Authority after a specified period of time (typically somewhere between 25 and
30 years in the transport sector and 15 and 25 years for energy and waste/water). The Contracting Authority should carefully
consider the quality of the asset it expects to receive back at the end of the term and how to ensure that the Private Partner
ensures that the asset achieves that standard.
Cap and collar arrangement An agreement not to go above (cap) or below (collar) certain amounts in relation to a particular requirement (e.g. subsidy levels in
the case of a “cap and collar subsidy arrangement”).
Changes in law The amendment or passing of new laws, as well as new interpretations of laws, that conflict with the laws affecting the project and
impact upon the project; change in law protection may be subject to a specified level of materiality before any protection is given
(e.g. demonstrating the change has a minimum financial impact on the Private Partner).
Commercial lenders The parties, typically international banks but may also include local banks, who provide financial backing to the project, taking an
interest by way of security – often of the asset in question or the project as a whole.
Commercial operate date / The date on which the construction phase of the project is successfully completed (typically determined by some form of
commercial operations / COD / independent certification and/or testing regime); the scheduled COD represents a target date for such successful completion with
Scheduled COD failures to achieve that date having commercial consequences (typically delay liquidated damages and/or termination).
8

Community engagement Steps taken to ensure that the project in question can adequately function in the local community. This may be by developing the
land in a way that is as compliant as possible with local customs, employing a certain amount of local citizens or engaging with
local businesses.
Compulsory acquisition The process whereby the Contracting Authority does not give the local land owners a choice to sell their land, but rather uses its
legislative powers to compel them to sell for a predetermined price.
Concession agreement / power The agreement outlining the terms on which the project will be undertaken (e.g. BOO, BOOT, BOT). In the energy sector, this is
purchase agreement (PPA) typically the PPA.
Construction phase The period from when the Private Partner takes control of the project site (typically by reference to the date of signing or effective
date (if conditional) of the concession agreement or the commencement of construction by reference to certain works) until the
commercial operations date.
Contracting Authority The Government or other public sector entity, either acting in its own capacity or acting on behalf of the state, which contracts with
the Private Partner under the concession agreement.
CPI The consumer price index or similar metric
De minimis A minimum threshold often used in concession agreements to benchmark when something is of a material nature, thereby
triggering a consequence under the agreement.
Deductions A method, set out in the payment mechanism by which payments to the Private Partner are reduced if it fails to meet the key
performance indicators. Sometimes called Abatements.
Default termination Where an innocent party exercises its contractual right to terminate the concession agreement in whole or in part due to the other
party’s actual or anticipatory failure to perform its contractual obligations.
Demand risk projects Projects which rely on demand forecasting (e.g. road and rail use) to determine the bankability of the project.
Design-Build-Finance-Operate / The project structure whereby the Private Partner designs and then builds the project asset in question. It then finances and retains
DBFO the responsibility to operate the project.
Developed market A market that frequently witnesses large-scale industrial projects with a stable economy and legislative system capable of
governing and enforcing the concession agreement in a fair and predictable manner.

SIN-#7991991-v10
9

Direct agreement / tripartite An agreement between the Contracting Authority, Private Partner and the lenders under which the Contracting Authority agrees to
agreement give the lenders contractual remedies in the event of the Private Partner defaulting under its contractual obligations before the
Contracting Authority can terminate the concession agreement.
Emerging market A market in which few large-scale industrial projects have been commenced, often with a legal structure that can lead to a degree
of unpredictability, for example, uncertainty in the need for particular licences.
EPC contract A form of contracting arrangement where the contractor is made responsible for all the activities from, procurement, construction,
to commissioning and handover of the project to the principal/owner. Often, referred to as a lump-sum turnkey contract.
Equator Principles A risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and
social risk in projects. It is primarily intended to provide a minimum standard for due diligence to support responsible risk decision-
making. These can be found at: http://www.equator-principles.com/
Equity Monies used to finance a deal that is sourced from the existing finances of a company (for example, raised through the issuing of
shares in the company), rather than though external debt (for example, from commercial lenders).
Equity return The amount of a company’s net income returned as a percentage of the shareholders’ equity.
Expropriation Where the Government takes privately owned property and declares it for public use.
Finance Documents The key finance documentation which typically includes a facility agreement with one or more commercial lenders, an intercreditor
agreement between the commercial lenders, equity investors and Private Partner, direct agreement(s) and security documents.
Float period The amount of time that one stage of the project can be delayed without causing delay to any subsequent stages of the project.
Force majeure An event, outside the control of the contracting parties, that results in one or both of the parties being unable to fulfil their
contractual obligations. In common law jurisdictions the definition of force majeure is typically a matter of drafting and negotiation
whilst in civil law jurisdictions is normally set out in the relevant civil or commercial code.
Foreseeable /unforeseeable Circumstances in the reasonable contemplation of the parties given their knowledge at the time of entering into the concession
agreement. Unforeseeable having the opposite meaning.
Functional specification The document outlining the required specification of as-built project and how the project is to operate in practice.

SIN-#7991991-v10
10

IFC Safeguards All projects undergoing the International Finance Corporation’s (IFC) initial credit review process after 1 January 2012 must follow:
 The Policy on Environmental and Social Sustainability, which defines IFC's commitments to environmental and social
sustainability;
 The Performance Standards, which define clients' responsibilities for managing their environmental and social risks; and
 The Access to Information Policy, which articulates IFC's commitment to transparency.
These can be found at
http://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+sustainability/our+approach/risk+managem
ent/ifcsustainabilityframework_2012.
Indigenous land rights The legal or beneficial interests in the land on which the project will be built that belongs to local citizens or affects their customs in
a material way.
Investors Parties who provide capital to the project enabling it to commence, seeking to make gains on the monies provided in the form of
interest payments or a proportion of profits from the project (i.e. equity return).
Government support Where the Government in the jurisdiction in which the project is based actively uses its powers to enable the project to function, or
acts in a passive manner whereby it does not prevent the project from commencing. Such support may extend to guarantees if the
Contracting Authority is perceived by the Private Partner to be a credit risk and/or other fiscal measures designed to stabilise any
jurisdictional uncertainties that make the project not bankable (e.g. foreign currency protections and tax breaks)
Grace period The period after an obligation is due for performance during which such obligation may still be performed without declaring an
event of default and/or termination.
Hair trigger Circumstances that easily and disproportionately allow a party to terminate all or part of contract with no genuine prospect of the
offending party remedying the issue.
Hedging arrangements An instrument used to limits exposure to a price or unit of value that fluctuates. These typically cover interest rate, foreign currency
exchange rates or commodity prices and/or inflation.
Hedging termination costs The costs associated with terminating any hedging arrangements prior to their expiry.

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11

Liquidated damages / LDs A specified monetary amount paid for a specific contractual breach that aims to compensate the injured party for the loss it suffers
for such breach. Such amounts are agreed up front and in many common law jurisdictions must be a genuine pre-estimate of loss
to withstand challenges that such regimes are unenforceable because they are deemed a penalty.
Longstop date A date which is tied to a prescribed time period after a scheduled completion date by when all obligations must have been fulfilled
otherwise a right of termination will typically arise.
MSA Manufacture and supply agreement.
Natural force majeure A force majeure event that is brought about by an act of nature, for example, an earthquake.
Non-default termination The situation in which the contract can be terminated by an event that is not brought about by either party breaching their
contractual duties (e.g. termination for extended force majeure or termination by agreement).
Novate / novation Replacing one of the parties to an agreement with another party who consequently takes on the rights and obligations of the party
who is no longer bound by the contract (in contrast to an assignment whereby, typically, only rights can be transferred).
O&M Operation and maintenance – where a party is responsible for the continual functioning of the project after the commercial
operations date.
Operations phase The functional stage of the project after the construction phase when it adequately operates, finishing with the end date of the
concession agreement.
Output specification The document outlining the levels of capacity from the project from a technical and financial perspective that are required in order
to ensure the projected is built to the desire standard and is profitable. It is critical that Contracting Authority gets this document
right as it is the functional demand of the project that the Private Partner will build and perform to.
Payment mechanism The formulae used to assess performance of the project and to calculate the payments to be made to the Private Partner assessed
against their compliance with the performance indicators.
Performance indicators / KPIs Benchmarks to measure performance and of the project, or the parties’ contribution to the project. These are typically referenced to
the output specification and are the benchmark against which the Private Partner is incentivised to perform. If the Private Partner
falls short of the performance indicators then typically deductions will be made and in persistent or material circumstances a right of
termination may arise. It is imperative that the Contracting Authority runs a sensitivity analysis in the payment mechanism to

SIN-#7991991-v10
12

calibrate the deductions.


Performance specification The document outlining the way in which the project must be operated throughout the life of the concession agreement and
typically includes KPIs.
Political force majeure A force majeure event that is brought about by the direct acts of the Government, such as a nationwide strike protesting the
Government’s actions, or by indirect events affecting the Government, such as war. Similar terminology used may include “material
adverse Government action / events of Government action / inaction / buyer risk events (which may also extend to Contracting
Authority breach).
Private Partner The entity from the private sector that undertakes the project typically through the use of a special purpose vehicle incorporated
specifically and only for the purposes of undertaking the project.
Project developer The entity employed by the Private Partner or subsidiary to build the project.
Rehabilitate-Operate-Transfer / The project structure whereby the Private Partner receives from the Contracting Authority an existing asset, may then upgrade,
ROT improve or rehabilitate that asset and then operate and maintain the asset to the agreed standard and subsequently transfers it
back to the Contracting Authority after a specified period of time (typically somewhere between 25 and 30 years in the transport
sector and 15 and 25 years for energy and waste/water). The Contracting Authority should carefully consider the quality of the
asset it expects to receive back at the end of the term and how to ensure that the Private Partner ensures that the asset achieves
that standard.
Senior debt Money that is borrowed by the Private Partner to finance a project that takes priority over any ‘junior’ debt (lower down the order of
priority) or equity in the event that the project company becomes insolvent.
Set-off If one of the contracting parties is owed monies by another contracting party, the debtor’s right of set-off allows it to balance mutual
debts with the creditor.
Sponsor The party that is the ultimate owner of the Private Partner. It invariably includes the major project parties such as construction
contractor and commonly includes financial investors or funds. Sponsors will limit their liability to the project through the Private
Partner but may need to give limited support or guarantees to the lenders of the senior debt, particularly during the construction
phase.
Stabilisation Contractual clauses that entrench certain legal provisions, enabling foreign investors to protect themselves from changes in the law

SIN-#7991991-v10
13

and a certain degree of political risk.


Substitute concessionaire The party who fulfils the obligations of the Private Partner in the event that the concession agreement is novated.
Tariff The rate at which prices for the project output – for example, electricity in the context of a project in the energy sector - are paid
between the Contracting Authority and Private Partner, in relation to either a predetermined price or agreed formula.
Termination costs The fee charged to a party to the contract when it wants to break the contract.
Termination trigger An event that allows for an innocent party to terminate a contract in the event that the other party to the contract breaches its
obligations.
Uninsurable When a project, or part of a project, cannot be covered by any insurance policy or insurance cover cannot be obtained on the
specified terms, or when it is not commercially feasible to obtain an insurance policy for the project or insurance cover on specified
terms.

SIN-#7991991-v10
Transport Sector

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 15

Transport Sector

Risk Matrix 1: Toll road (DBFO)


 New toll road project, developed as a DBFO transaction
 Assumes that the Contracting Authority identifies the right-of-way
 Project may be structured either as availability payment or revenue risk
 Design, build, operate, maintain and transfer of a new road
 Tolling may form part of the scope, may be separately tendered or may be retained by the Contracting Authority
 Scope may include emergency accident and preventative responsibilities
 Project scope may need to include obligations to interface with future changes in tolling technologies (such as real time tolling) and other future extensions or new
interconnected roads

 Key risks

 Land purchase and site risk


 Demand risk

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 16

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Land purchase The risk of acquiring Developed X The Contracting Authority bears the The Contracting Authority should The Contracting Authority Land rights and ground
and site risk title to the land to be principal risk as it is best positioned to undertake detailed ground, may need to use its conditions in developed
used for a project, the select and acquire the required land environmental and social legislative powers to markets are typically more
selection of that site interests for the project. assessments and should secure the site (e.g. established and risks can be
and the geophysical However, there may be some areas disclose such information to the through expropriation / mitigated with appropriate due
conditions of that site. where risk will be shared with the Private Private Partner as part of the compulsory acquisition). diligence with relevant land
Planning permission. Partner. While the Contracting Authority bidding process. Such Even in the case of a registries and utility records.
may be able to secure the availability of assessment should consider any legally clear site, the The Private Partner’s
Access rights. easements and covenants, etc.
the corridor, the suitability of the corridor Contracting Authority may obligations with regards to
Security. may be dependent on the Private that may encumber the land. need to invoke indigenous rights are
Heritage. Partner’s design and construction plan. The Contracting Authority Government enforcement generally well legislated in
The Contracting Authority would generally should, to the greatest extent powers to properly secure developed markets. For
Archaeological.
be responsible for providing a “clean” site, possible, ensure that it has a the site for the private example, the requirement to
Pollution, hazardous complete understanding of the sector. There may be enter into indigenous land use
with no restrictive land title issues, as well
materials. risks involved in securing the historic encroachment agreements under native title
as resolving issues with existing utilities
Latent defects. and contamination. site and those that will affect the issues that the Private legislation in Australia and the
construction and operation of the Partner is not best equivalent under first nations
Easements, The Contracting Authority will normally toll road. positioned to resolve. law in Canada.
encroachments hand over the site to the Private Partner in
setback, etc. an “as-is” condition. The Private Partner The Contracting Authority should Examples include the On the other hand the rights
may take the risk for dealing with adverse also manage any indigenous relocation of people (e.g. of private landowners against
conditions revealed by surveys regarding land rights issues that may the removal of informal forced sales or expropriation
unforeseeable subsoil risks. preclude the use of the site. housing or businesses) might be stronger in
Prior to awarding the contract, and continued efforts to developed markets, requiring
Where it is not possible to fully survey manage the social and more time to acquire the land.
prior to award (eg in high density urban the Contracting Authority could
(through legislation and a proper political impact of the
areas) risk will be allocated to Contracting project on and around the
Authority or shared. consultation process) limit the
ability of land owners or adjacent site including a
The risk of artefacts may be shared where properties and trades to raise compensation regime for
the Private Partner may bear the risk in claims on the land. affected properties
respect of designated areas, and the adjacent to the road.
Contracting Authority may bear the risks The Contracting Authority should
complete the process of land The Contracting Authority
of findings outside such areas. may be required to
acquisition before the contract is
awarded. provide additional site
security / assistance
during operations to
manage this risk.

Land purchase The risk of acquiring Emerging X The Contracting Authority bears the The Contracting Authority should The Contracting Authority Land rights and ground
and site risk title to the land to be principal risk as it is best positioned to undertake detailed ground, may need to use its conditions (in particular
used for a project, the select and acquire the required land environmental and social legislative powers to reliable utilities records, and
selection of that site interests for the project. assessments and should secure the site (e.g. land charges) in emerging
and the geophysical However, there may be some areas disclose such information to the through expropriation / markets may be less certain
conditions of that site. where risk will be shared with the Private Private Partner as part of the compulsory acquisition). than in developed markets
Planning permission. Partner. While the Contracting Authority bidding process. Such Even in the case of a where established land
may be able to secure the availability of assessment should consider any legally clear site, the registries and utility records
Access rights. easements and covenants, etc. exist.
the corridor, the suitability of the corridor Contracting Authority may
Security. may be dependent on the Private that may encumber the land. need to invoke In the absence of legislation in
The Contracting Authority Government enforcement emerging markets, indigenous

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 17

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
Heritage. Partner’s design and construction plan. should, to the greatest extent powers to properly secure land rights issues and
Archaeological. The Contracting Authority would generally possible, ensure that it has a the site for the private community engagement can
be responsible for providing a “clean” site, complete understanding of the sector. There may be be managed by the
Pollution, hazardous risks involved in securing the historic encroachment Contracting Authority through
materials. with no restrictive land title issues, as well
as resolving issues with existing utilities site and those that will affect the issues that the Private the adoption of IFC
Latent defects. and contamination. Existing assets construction and operation of the Partner is not best Safeguards for the project,
proposed to be used in the project should toll road. positioned to resolve. particularly in order to ensure
Easements,
also be fully surveyed and warranted. The The Contracting Authority should Examples include the international financing options
encroachments
Private Partner may take the risk relating also manage any indigenous relocation of people (e.g. are available to the project.
setback, etc.
to known adverse conditions but other land rights issues that may the removal of informal See comments on
unforeseeable ground risks (e.g. preclude the use of the site. housing or businesses) “Environmental and Social
archaeological risks, unknown hazardous and continued efforts to Risk” for a toll road project in
Prior to awarding the contract, emerging markets.
materials) will likely be borne by the the Contracting Authority could manage the social and
Contracting Authority. (through legislation and a proper political impact of the
The Contracting Authority should also consultation process) limit the project on and around the
consider the impact that the project will ability of land owners or adjacent site.
have on adjacent properties and properties and trades to raise The Contracting Authority
industries and may need to retain the risk claims on the land. may be required to
of unavoidable interference with such provide additional site
parties. security / assistance
during operations to
manage this risk.

Environmental and The risk of the existing Developed X The Private Partner will have primary The Contracting Authority should The Contracting Authority Environmental scrutiny is
social risk latent environmental responsibility to accept the project site in conduct the necessary due will need to take increasing even in developed
conditions affecting the an “as is” condition, subject to Contracting diligence in order to ascertain meaningful steps both markets, as both Private
project and the Authority’s disclosure of relevant matters, the environmental fitness of the before and during the Partners and Contracting
subsequent risk of and manage the environmental and social site and disclose all known project to manage social Authorities have come under
damage to the strategy across the project, as well as environmental issues to the impacts of construction increasing burdens to develop
environment or local obtaining all required licenses, permits Private Partner. The Private and operation. sound environmental and
communities. and authorizations as necessary. This Partner will have to duly Investors and lenders social risk management plans
also comprises to a certain extent the risk examine the documents may expect to see a plan before construction begins.
of unknown environmental conditions to provided by the Contracting addressing these
the extent an experienced contractor Authority in order to be aware of aspects, including the
would have considered their existence as potential risks. execution of any
being possible. Depending on the specific risk necessary contractual
Existing environmental risks of the site allocation in the individual arrangements.
prior to the Private Partner’s acceptance project the Private Partner might
of the site that have not been disclosed or be further obliged to undertake
within the knowledge of the Private additional surveys.
Partner prior to commercial close will be The Private Partner will mitigate
deemed to be the responsibility of the risks by appropriately allocating
Contracting Authority. such risks to appropriate
In some projects the Private Partner is subcontractors.
obliged to perform surveys of the ground
conditions. Social risks, insofar as they
may involve indigenous groups, will be the
responsibility of the Contracting Authority.

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 18

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Environmental and The risk of the existing Emerging X The Private Partner will have primary The Contracting Authority should Government will need to International lenders and
social risk latent environmental responsibility to manage the conduct the necessary due take meaningful steps development finance
conditions affecting the environmental and social strategy across diligence in order to ascertain both before and during institutions are particularly
project and the the project, however existing the environmental fitness of the the project to manage sensitive about environmental
subsequent risk of environmental conditions which cannot be site and disclose all known social impacts of and social risks, as a result of
damage to the adequately addressed or priced may need environmental issues to the construction and their commitment to the
environment or local to be retained by the Contracting Private Partner. operation. Equator Principles. They will
communities. Authority. The Contracting Authority will be Investors and lenders look very closely at how these
The Contracting Authority may also need required to review all may expect to see a plan risks are managed at both
to retain responsibility for social impacts environmental plans put forth by addressing these private and public sector level
which are unavoidable from the the Private Partner, to ensure aspects, including the and this scrutiny is helpful to
development of the project (e.g. that such plans will be adequate execution of any mitigate the risks posed by
compensation for expropriation of to appropriately manage the necessary contractual these issues.
indigenous land rights and/or relocation of risks of the project. arrangements.
urban communities / businesses). The Private Partner will mitigate Active stakeholder
risks by appropriately allocating management by the
such risks to appropriate Contracting Authority will
subcontractors. be critical to achieving
key milestones.

Design risk The risk that the project Developed X The Private Partner will have principal The Contracting Authority will The Contracting Authority Developed market toll road
has not been designed responsibility for adequacy of the design often broadly draft the Private usually provides for a projects benefit from stable
adequately for the of the toll road and its compliance with the Partner’s design and basic design, but bidders resource availability and
purpose required. output / performance specification. construction obligations to will be responsible for any defined design standards
Feasibility study. The Contracting Authority may provide to satisfy the performance errors, if they adopt this which allow for increased
the bidders a basic design, but bidders will specifications and ensure design for their detailed innovation and productivity
Approval of designs. compliance with applicable legal design. gains. The quality of the
be responsible for any errors, if they
Changes to design. assume this design for their detailed requirements and good industry information provided by the
design. practice standards. This allows Contracting Authority and
for private sector innovation and limited ability to verify such
However, in some road projects, as in efficiency gains in the design. data can also hinder the
Germany for example, there is only Private Partner’s ability to
limited room for individual design, since all A design review process will
allow for increased dialogue and unconditionally take full
key aspects and many details are already design risk.
fixed in the official planning approval cooperation between the
decision. If the Private Partner wants to Contracting Authority and the
deviate from these requirements it must Private Partner, however the
conduct formal amendment procedures, mutual review process should
which in practice have not taken place yet. not be construed as a reduction
or limitation of the Private
If the project is being integrated into Partner’s overall liability.
existing infrastructure, the Private
Partner’s ability to warrant the fitness for The Private Partner will mitigate
purpose of its design solution may be risks by appropriately allocating
impacted (in that it will not be able to such risks to appropriate
warrant defects in the existing subcontractors.
infrastructure that may impact
performance).

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 19

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Design risk The risk that the project Emerging X The Private Partner will have principal The Contracting Authority may The Contracting Authority Emerging market toll road
has not been designed responsibility for adequacy of the design wish to limit how prescriptive it usually provides for a projects may be particularly
adequately for the of the system and its compliance with the should be in the performance basic design, but bidders dependent on availability of
purpose required. output / performance specification. specification. It may wish to will be responsible for any reliable resources necessary
Feasibility study. The Contracting Authority may retain request be a degree of errors, if they adopt this for construction and operation,
some design risk in certain aspects of the cooperation and feedback during design for their detailed which have implications for
Approval of designs. the bidding phase to ensure that design. the Private Partner’s ability to
system or related works, depending on
Changes to design. how prescriptive the Contracting Authority the bidding consortia’s meet the reliability
is in the performance specification. expectations in terms of an requirements in the
appropriate risk allocation for performance specification.
If the performance specification is too design responsibility are take
prescriptive (e.g. the required route into account when finalizing the
corridor constrains the efficiency of the performance specification.
design) the Private Partner’s ability to
warrant the fitness for purpose of its The Private Partner will mitigate
design solution may be impacted, and the risks by appropriately allocating
Contracting Authority will to that extent such risks to appropriate
share in the design risk. subcontractors.

Prescriptiveness of performance
specification dependant on depth of
feasibility study.
Delay in approving designs Contracting
Authority risk.
Changes to design depend on reason for
change – original design deficient Private
Partner risk or change required by
Contracting Authority may be a
Contracting Authority risk.

Construction risk Labour dispute. Developed X The Private Partner assumes project The Private Partner will mitigate If standards change after Associated risks that can
Interface/ project management risk unless certain work is risks by appropriately allocating the tender, the affect construction costs, such
management. dependent on Contracting Authority such risks to appropriate Contracting Authority may as inflation, should also be
Commissioning work/related infrastructure work being subcontractors. consider increasing the considered. The Private
damage. completed in which case risk could be Additionally, standards or codes payments to account for Partner will generally price in
shared. revised after the tender date increased costs of this risk in economies where
Intellectual property compliance or Private such risk can be projected
breach / infringement. The Contracting Authority may request a may be deemed relief events if
performance and warranty bond from the compliance with such revisions Partner will be excused and quantified.
Quality assurance Private Partner. increase the cost and or time to from compliance with the Turnkey construction
standards. perform the work. new standard. contracts and guaranteed
Private Partner assumes labour dispute
Defects. risk unless primarily political risk, however In cases of cost overruns, completion dates, costs, and
relief may be available for strikes and contractual provisions may performance standards are
Subcontractor
other widespread events of labour unrest. provide for additional equity or often negotiated during project
disputes/insolvency.
additional financing. development.
Cost overruns where Private Partner takes risk of intellectual
property infringement. In developed markets risk is
no compensation /relief
considered manageable
event applies. Private Partner required to design and through robust pass through
construct the project in accordance with of obligations to credible and
good industry practice, and is responsible experienced subcontractors

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 20

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
for completing the project free of defects and by appropriate timetable
and latent defects. and budget contingency.
Private Partner assumes risk of cost
overrun where no compensation/relief
event applies.
Private Partner takes risk of cost overrun
where no compensation/relief event
applies.

Construction risk Labour dispute. Emerging X The Private Partner assumes project The Private Partner will mitigate It is elemental in PPP Associated risks that can
Interface/project management risk unless certain work is risks by appropriately allocating projects that the Private affect construction costs, such
management. dependent on Contracting Authority such risks to appropriate Partner is responsible for as inflation, should also be
Commissioning work/related infrastructure work being subcontractor. construction risks and considered. In emerging
damage. completed in which case risk could be The Private Partner will often that the responsibility for markets such risk
shared. agree on a lump sum price with defects does not expiry determination may be difficult,
Intellectual property prior to the expiry of the especially considering the
breach Private Partner assumes labour dispute subcontractors in order to
risk, however relief may be available for exclude the risk of cost contract. foreign supply contracts that
breach/infringement. may be necessary for the
strikes and other widespread events of overruns. However, if standards
Quality assurance labour unrest. change after the tender, project.
standards. The Private Partner will then
Private Partner takes risk of intellectual retain the risk that liability caps the Contracting Authority
Defects. property infringement. agreed under the subcontract may consider increasing
are reached or that the warranty the payments to account
Subcontractor Private Partner required to construct the
period under such subcontract is for increased costs of
disputes/insolvency. project in accordance with good industry
shorter than its defect compliance or Private
Cost overruns where practice, and is responsible for completing Partner will be excused
the project free of defects and latent rectification obligations towards
no compensation /relief from compliance with the
defects. the Contracting Authority.
event applies. new standard.
Private Partner assumes risk of cost Additionally, standards or codes
overrun where no compensation/relief revised after the tender date
event applies. may be deemed relief events if
compliance with such revisions
Private Partner takes risk of cost overrun increase the cost and or time to
where no compensation/relief event perform the work.
applies.

Completion The risk of Developed X The Private Partner will bear principal Depending on road length, the The Contracting Authority In developed markets,
(including delay commissioning the responsibility for delay and cost overrun Contracting Authority may wish may have a critical role to enforcement of construction
and cost overrun) asset on time and on risk, and will typically manage this through to implement a multi-staged play at stages of the deadlines and budgets may
risk budget and the the engagement of a suitable EPC completion process to ensure construction, testing and be easier as the Private
consequences of contractor. the Private Partner begins commissioning process in Partner will typically have
missing either of those The principal risk arising out of delay will receiving payment for its design terms of ensuring that more experience and reliable
two criteria. be the loss of expected revenue, the and construction services once any rights that it has to access to resources.
ongoing costs of financing construction, significant components of the comment on design However, where the projects
holding costs of other contractors and project are substantially development does not involve large elements of
extended site costs. completed. This can help adversely delay the tunnelling, construction risk
increase cash flow during project. will be more carefully
The Private Partner is best placed to construction, reduce the Private assessed by the Private
integrate complex civil works, bridge The Contracting Authority
Partner’s financing costs and may allow for certain Partner. In some projects this
works, tunnelling (if relevant) and, if within incentivize the phasing of may lead to tunnelling
scope, tolling equipment design and relief events, delay

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 21

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
installation. construction works in order to events or force majeure components being separately
ensure critical components are events where delays or procured on a non-PPP basis.
completed on time. Financial cost overruns have arisen
penalties and liquidated from either the fault of the
damages can help enforce Contracting Authority, or
construction deadlines. no-fault events.
However, a single completion Similarly the Contracting
regime is more common. Authority may need to
The combination of (i) incentives take responsibility for
or penalties for timely delays caused by the
completion and (ii) the failure of public bodies to
implementation of a “longstop issue necessary consents
date” (a date which is pegged to in good time. However, in
a prescribed time period after many cases the
the scheduled completion date) Contracting Authority has
will create the necessary tension not been willing to accept
to incentivize timely completion this risk
while allowing the Private
Partner a reasonable amount of
time to meet its contractual
responsibilities in spite of delays
before the Contracting Authority
can terminate the project.
The Contracting Authority may
also consider the inclusion of a
look forward test to trigger a
default if an independent party
certifies that completion will not
be achieved by the longstop
date. However, the concept of a
“longstop date” as a specific
reason for early termination has
not been common in European
toll road projects.
The Private Partner will mitigate
risks by appropriately allocating
such risks to appropriate
subcontractors.

Completion The risk of Emerging X The Private Partner will bear principal It may be difficult for the Private The Contracting Authority Some emerging market toll
(including delay commissioning the responsibility for delay and cost overrun Partner to mitigate integration may have a critical role to road projects have faced
and cost overrun) asset on time and on risk, and will typically manage this through risks associated with a multi- play at stages of the significant construction issues
risk budget and the the engagement of a suitable EPC staged completion process construction, testing and and the Contracting Authority
consequences of contractor. solely through contractual risk commissioning process in will need to be prepared to
missing either of those The principal risk arising out of delay will allocation, as the financing cost / terms of ensuring that enforce its rights to manage
two criteria. be the loss of expected revenue, the lost revenue impact is typically any rights that it has to the consequences of a failure
ongoing costs of financing construction very high compared to the comment on design by the Private Partner to meet
and extended site costs. individual component parts of development and testing the construction milestones. In
the project that can affect such results does not an emerging market context

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 22

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
The Private Partner is best placed to risks. Ensuring that the adversely delay the the dynamics may be different
integrate complex works, bridge works, programme has sufficient float project. if the lenders have a
tunnelling (if relevant) and, if within scope, periods for all critical stages and Similarly the Contracting significant underwrite of their
tolling equipment design and installation. that parties are incentivised to Authority may need to senior debt.
work together to achieve the take responsibility for The management of
common deadlines may be more delays caused by failure completion risk is typically
effective strategies. of public bodies to issue addressed by having either: (i)
The Private Partner will mitigate necessary consents in a scheduled completion date
risks by appropriately allocating good time. (with attached liquidated
such risks to appropriate damages for delay) followed
subcontractors. by a fixed concession period
for operation, or (ii) the
scheduled construction period
forming part of the fixed
concession period (with
extensions for certain events
such as force majeure). With
the latter scenario, in
emerging markets, the
Contracting Authority may
attempt to additionally impose
delay liquidated damages on
the Private Partner. However
this decision should always be
assessed against the
likelihood that genuine out-of-
pocket costs will actually be
incurred for such delay, so as
to avoid unnecessary
contingency being built into
the project (which then
increases the ‘price’).

Performance/ The risk that the asset Developed X The Private Partner bears the risk of The onus falls upon the Where certain In developed markets, the
price risk is able to achieve the meeting the performance specification. Contracting Authority to draft performance indicators Contracting Authority should
performance However, the Contracting Authority is attainable standards based on cannot be met due to have access to various data
specification metrics responsible for enforcing the regime and relevant market data and policy actions by the sources to develop realistic
and the price or cost of for ensuring that the performance objectives. Performance based Contracting Authority or and attainable performance
doing so. specifications are properly tailored to what on availability, and quality of unforeseen specifications and models.
Damage pollution the Private Partner can deliver. operation and maintenance circumstances, the
accidents. Consideration needs to be given to the service can be measured Private Partner may be
ability of the Private Partner to achieve the against pre-determined eligible to seek relief or
Meeting handback schedules or standards and compensation.
requirements. necessary performance levels, and the
appropriateness of metrics given the secured by respective penalties
Vandalism. nature of the project. and deductions.
Equipment becoming In an availability based payment structure Risk profiles recognize the
prematurely obsolete. the Private Partner may be subject to decreased need for mitigation as
abatement if performance based the project matures, but early
Expansion.
standards are not met. These standards stage mitigation measures are

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 23

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
may be linked to traffic flow KPIs or necessary in order to stabilize
accident response measures (for early losses.
example). The Private Partner will mitigate
risks by appropriately allocating
such risks to appropriate
subcontractors.

Performance/ The risk that the asset Emerging X The Private Partner bears the risk of The Private Partner may require Where certain For emerging markets,
price risk is able to achieve the meeting the performance specification. the Contracting Authority to performance indicators particularly in the case of
performance The Contracting Authority bears the risk of reduce the performance cannot be met due to market first projects, the
specification metrics enforcing the regime and for ensuring that requirements during the settling actions by the preparation of attainable
and the price or cost of the performance specification is properly in period and possibly readjust Contracting Authority or standards by the Contracting
doing so. tailored to what the Private Partner can the performance metrics once unforeseen Authority is complicated by
Damage pollution deliver. the performance of the toll road circumstances, the the lack of relevant market
accidents. has stabilized. This would Private Partner may be data.
Consideration needs to be given to the mitigate the risk of long-term eligible to seek relief or
Meeting handback ability of the Private Partner to achieve the There is sometimes a risk that
performance failure. compensation. Contracting Authorities take a
requirements. necessary performance levels given the
nature of the project and the emerging The Private Partner will mitigate ‘best in class’ approach and
Vandalism. risks by appropriately allocating set standards for higher than
market in which it will be based.
Equipment becoming such risks to appropriate may be achievable especially
prematurely obsolete. subcontractors. if driving and vehicle
maintenance standards fall
Expansion.
below the aspirational
standards.

Resource or input The risk that the supply Developed X The Private Partner bears the principal The Contracting Authority will be Monthly payments to the Developed markets generally
risk of inputs or resources responsibility to ensure an uninterrupted allowed to monitor the supply of Private Partner may do not experience market
required for the supply of resources for the project and to required resources, and may include a general cost volatility to the extent of
operation of the project manage the costs of those resources allow for the Private Partner to indexation cover in order emerging markets, and
is interrupted or the In respect of toll roads this is especially substitute resources if to partially cover cost resource availability is less of
cost increases. relevant regarding special, but regular necessary. For example, the increases that would a concern, however energy
weather conditions, such as winter road Contracting Authority may otherwise be borne by the costs may still vary
clearance, or monsoon flooding. request a winter clearance Private Partner. significantly over the course of
concept before start of operation project that must be
in order to ensure that the accounted for.
Private Partner provides for
sufficient resources.

Resource or input The risk that the supply Emerging X The Private Partner bears the principal Some of the cost risk can be The Contracting Authority Emerging markets are
risk of inputs or resources responsibility to ensure an uninterrupted managed on demand-risk may need to stand behind generally more susceptible to
required for the supply of resources for the project and to projects by passing the risk the cost risk for certain market volatility and major
operation of the project manage the costs of those resources. through to the user by way of toll inputs, or at least cost variations. See comment
is interrupted or the There may be specific instances where adjustments. underwrite the Private on exchange rate for a toll
cost increases. the Private Partner may need to the share The Private Partner will mitigate Partner’s financing for road project in emerging
this risk with the Contracting Authority, risks by appropriately allocating these costs. markets.
such as availability of energy supply, or such risks to appropriate
reliance on local source materials where subcontractors.
these may be affected by labour disputes,

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 24

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
embargos or other political risks. Lenders may look to sponsors
Time and cost risks are normally passed for completion support.
on to contractors.

Demand risk The availability by both Developed X The earlier projects placed demand risk If it is absorbing demand risk, As the Contracting In developed markets, the
volume and quality on the Private Partner but in many the Contracting Authority should Authority will be retaining Contracting Authority should
along with developed markets (Europe and Australia) do a full assessment of demand demand risk, it will need have access to various data
transportation of traffic forecasts fell short of expectation risk and should ensure that the to ensure that it is sources to develop realistic
resource or inputs to a and there were a few insolvencies. Over concession agreement comfortable (both and attainable traffic and
project or the demand recent years it has become more common appropriately addresses and politically and revenue forecasts, such that
for the product of for the default position for toll road allocates the risk for everything economically) with the Contracting Authority is
service of a project by projects in developed markets to provide that will impact on demand. demand forecasts. well placed to manage
consumers/users. for the Contracting Authority to retain The parties should also develop Where a demand based demand risk.
demand and toll revenue risk (risk of a comprehensive market project has a MAC A number of developed
traffic numbers and total revenue receipt). strategy to deal with the regime, the parameters of markets tender gas stations
Demand risk is unlikely to be accepted by implementation of the project. the Private Partners’ and service stations
the private sector in the absence of protection will need to be separately and this removes
extensive traffic analysis and a regime carefully negotiated to additional potential revenue
that protects the Private Partner from ensure the Contracting streams from the Private
“material adverse changes” such as new Authority and other Partner who would become
competing transport options or changes to relevant Government solely reliant on traffic volume.
surrounding traffic and road conditions. bodies retain sufficient
flexibility to implement
other necessary urban
development over the
term of the project.

Demand risk The availability by both Emerging X The default position for toll road projects Both the Contracting Authority There may need to be an It may be difficult for
volume and quality in emerging markets has been for the and Private Partner should do a element of subsidy from Contracting Authorities in
along with Private Partner to retain demand and toll full assessment of demand risk the Contracting Authority emerging markets, particularly
transportation of revenue risk (risk of traffic numbers and and should ensure that the if demand falls below a in the case of market first
resource or inputs to a total revenue receipt). There are concession agreement certain amount. If this is projects, where there is likely
project or the demand examples of some jurisdictions in Africa appropriately addresses and structured as a “cap and to be a lack of relevant
for the product of where there has been a push back on allocates the risk for everything collar” arrangement then comparative market data to
service of a project by this. that will impact on demand. the Contracting Authority begin with.
consumers/users. To the extent that toll revenue may be The parties should also develop should also start to In some emerging markets the
insufficient to cover the cost of financing a comprehensive market benefit from economic lack of any other viable traffic
and operating the project in question, as strategy to deal with the upsides above the Private solutions on a particular
well as meeting the likely project implementation of the project. Partner’s base case. corridor may also give the
contingencies, then some form of Some projects now ask Private Partner greater
taxation-based support within the payment bidders to price their confidence to accept demand
structure will be required, and the subsidy needs, risk which may further explain
Contracting Authority may need to retain developing a hybrid the difference in approach
an element of demand risk. (e.g. by the demand risk/availability between developed and
implementation of upper and lower limits model. emerging markets.
of revenues or a minimum guarantee). If there is high uncertainty
over traffic projections
and uncertainty over

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 25

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
revenues (due to tariff
limitations and/or
currency volatility) then
the project may need to
be structure purely on the
basis of an availability
fee.

Maintenance risk The risk of maintaining Developed X The Private Partner will have principal The Contracting Authority should Generally speaking, the In developed markets, the
the asset to the responsibility for meeting the appropriate take time to ensure that the Contracting Authority’s involvement of the Private
appropriate standards standards regarding maintenance as set documentation for existing undue interference with Partner in the operation,
and specifications for forth in the performance specifications bridges is up to date and a the Private Partner’s maintenance and
the life of the project. defined by the Contracting Authority. reliable basis for the calculation provision of maintenance rehabilitation of the project
Increased maintenance The Private Partner generally assumes of the bidders. and rehabilitation provides several benefits by
costs due to increased the overall risk of periodic and In the event that the allowed services reduces the incentivizing greater care and
volumes. preventative maintenance, emergency load weight of the trucks is benefits of the DBFO diligence by the Private
maintenance work, work stemming from changed, the road may be project model. Partner in the construction
Incorrect estimates and phase, and increasing the
cost overruns. design or construction errors, subject to increased abrasion.
rehabilitation work, and in certain project This risk should sit with the useful life of the infrastructure.
model instances, work stemming from Contracting Authority.
implementing technological or structural The primary role of the
changes. Contracting Authority is to
Note that in demand-risk projects, the properly define the performance
Private Partner takes the primary risk that specifications and level of
the toll road will be maintained to a services required of the Private
sufficient level of quality and reliability to Partner.
ensure that it can continue to attract Adequate performance by the
business. However where the toll road Private Partner can be enforced
constitutes an essential public service or by ensuring that the payment
effective monopoly operation over that mechanism considers quality
route, it would be sensible for the and service failures. The
Contracting Authority to include Contracting Authority will be
appropriate key performance indicators to allowed to adjust payment to the
monitor the service levels and take Private Partner based on
effective enforcement action (e.g. through meeting or failing to meet certain
penalties or reduced toll revenue performance standards. There
entitlements). may also be other remedies
As regards existing structures, such as such as warning notices and
bridges, the maintenance risk should be right to self-rectification of
allocated to the Private Partner to the deficiencies.
extent the conditions of the bridges are The Private Partner will mitigate
known and future maintenance work can risks by appropriately allocating
be assessed properly by an experienced such risks to appropriate
contractor. subcontractors.

Maintenance risk The risk of maintaining Emerging X The Private Partner will have principal The Contracting Authority should The Contracting Authority Some projects in emerging
the asset to the responsibility for maintaining the system ensure that the performance may be required to markets have been procured
appropriate standards to the appropriate standards set out in the specification properly defines the guarantee and proactively on a design-build basis with a

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 26

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
and specifications for performance specification defined by the maintenance obligations of the manage the maintenance view to then passing over the
the life of the project. Contracting Authority. Private Partner to ensure that of the existing roads that assets to an operations
Increased maintenance Note that in demand-risk projects, the the system remains robust in the integrate with the project. concessionaire. In this case
costs due to increased Private Partner takes the primary risk that event of early termination or the Contracting Authority will
volumes. the toll road will be maintained to a expiry of the agreement. need to ensure that it has
sufficient level of quality and reliability to Failure to get the output sufficient warranties of the
Incorrect estimates and project components to allow
cost overruns. ensure that it can attract business. specification right for the project
However where the toll road constitutes will effectively transfer risk back the operator to manage the
an essential public service or effective to the Contracting Authority. ongoing maintenance risk.
monopoly operation over that route, it The primary role of the
would be sensible for the Contracting Contracting Authority is to
Authority to include appropriate key properly define the performance
performance indicators to monitor the specifications and level of
service levels and take effective services required of the Private
enforcement action (e.g. through penalties Partner.
or reduced toll revenue entitlements).
Further, the Contracting
Where there is integration of the toll road Authority may establish a
into existing infrastructure, the Contracting facilities management committee
Authority may need to retain the to oversee the Private Partner’s
maintenance or latent defect risk of some performance of the maintenance
of the existing assets and fit for purpose and rehabilitation services, along
standards appropriately adjusted. with a formal mechanism to
discuss and resolve
performance related issues.
Adequate performance by the
Private Partner can be further
enforced by ensuring that the
payment mechanism considers
quality and service failures. The
Contracting Authority will be
allowed to adjust payment to the
Private Partner based on
meeting or failing to meet certain
performance standards. There
may also be other remedies
such as warning notices and
right to replace subcontractors.
The Private Partner will mitigate
risks by appropriately allocating
such risks to appropriate
subcontractors.

Force majeure risk The risk that Developed X Force majeure is a shared risk and there Project insurance (physical Generally speaking, On developed market
unexpected events will be a fairly well developed list of events damage and loss of revenue where parties are unable transactions, the Contracting
occur that are beyond that entitles the Private Partner to relief. coverage) is the key mitigant for to agree on a way Authority typically
the control of the Typical events include (i) war, armed force majeure risks that cause forward following a force compensates the Private
parties and delay or conflict, terrorism or acts of foreign physical damage. majeure event, an Partner, only for its
prohibit performance. amount of compensation outstanding debt (but not for

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 27

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
enemies; (ii) nuclear or radioactive On an availability based project, should continue to be its expected rate of return) for
contamination; (iii) chemical or biological the risk of disruption as a result payable by the termination arising from a
contamination; (iv) discovery of any of no-fault events could be Contracting Authority to “natural” force majeure.
species-at-risk, fossils, or historic or mitigated by suspending the the Private Partner in
archaeological artefacts that require the performance obligations order to service the
project to be abandoned or delayed. respectively. Private Partner’s debt
In the event the asset is destroyed prior to Alternatively the project may be obligations during the
hand over as a result of force majeure, the subject to abatement but course of the event.
Private Partner is obliged to re-build the excused from non- Where the project is
asset at its own costs, to the extent the performance/breach. terminated, it will be a key
risk is insurable. area of focus for
Force majeure events occurring during prospective lenders as
construction will also cause a delay in part of their initial credit
revenue commencement. The ability of assessments as to
the Private Partner to bear this risk for whether the debt will be
uninsured risks will be limited, and the kept whole in such a
Contracting Authority will typically have to scenario. From a lenders’
bear the risk after a certain period of time perspective the
or level of cost has been exceeded or to termination payment
establish other methods in order to limit made by the Contracting
the Private Partner’s risk in this regard. Authority in respect of the
equity will serve as a
During operation, the impact of the force buffer if the termination
majeure will depend on whether the payment of the
project is availability based (where relief Contracting Authority
from key performance indicator penalties does not cover 100% of
may be required) or is demand-based the outstanding debt.
(where an element of toll subsidy may be
required).

Force majeure risk The risk that Emerging X Force majeure is a shared risk and there Project insurance (physical See comments on the On emerging market
unexpected events will be a fairly well developed list of events damage and loss of revenue risk of uninsurability for a transactions, the Contracting
occur that are beyond that entitle the Private Partner to relief. coverage) is the key mitigant for toll road project in Authority often does not
the control of the Typical events could include: force majeure risks that cause emerging markets. provide any compensation for
parties and delay or physical damage. Design termination arising from a
prohibit performance. - natural force majeure events, which resilience is also an important “natural” force majeure, on the
typically can be insured (eg fire / flooding / mitigating factor for projects with grounds that this should be
storm, vandalism etc), and seasonal weather such as insured.
- force majeure events which typically monsoon.
cannot be insured (eg strikes / protest, On an availability based project,
terror threats / hoaxes, emergency the risk of disruption as a result
services etc.) of no-fault events could be
Force majeure events occurring during mitigated by relaxing the
construction will also cause a delay in performance thresholds (e.g.
revenue commencement. The ability of requiring a lower level of
the Private Partner to bear this risk for acceptable service, which then
uninsured risks will be limited, and the allows the Private Partner would
Contracting Authority will typically have to take the risk of a certain number
bear the risk after a certain period of time of day-to-day adverse events

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 28

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
or level of cost has been exceeded. typical to a project of this nature
During operation, the impact of the force but without incurring
majeure will depend on whether the performance penalties).
project is availability based (where relief
from key performance indicator penalties
may be required) or is demand-based
(where an element of fare subsidy may be
required).

Exchange and The risk of currency Developed X The Private Partner would look to mitigate Exchange and interest rates The Contracting Authority In developed markets, the risk
interest rate risk and interest rate this risk through hedging arrangements risks are typically not accounted is not expected to assist of currency and interest rate
fluctuations over the life under the Finance Documents, to the for beyond the Private Partner’s the Private Partner in fluctuations is not substantial
of a project. extent possible or necessary in that own hedging arrangements. mitigating such risks enough to require the
market. other than the risk of Contracting Authority to
The Contracting Authority may take the changes to the reference provide support.
risk of a change in the reference interest interest rate prior to
rate between submission of bid and financial close.
financial close. However in some
circumstances the
Contracting Authority may
seek to retain interest
rate risk if it feels it can
bear the risk more
efficiently than the private
sector.

Exchange and The risk of currency Emerging X The Private Partner would look to mitigate Some of the cost risk can be As tolls will be collected In emerging market toll road
interest rate risk and interest rate this risk through hedging arrangements managed on demand-risk in local currency the projects, the devaluation of
fluctuations over the life under the Finance Documents, to the projects by passing the risk Contracting Authority may local currency beyond a
of a project. extent possible in that market. through to the user by way of toll need to retain the risk of certain threshold may be a
In certain countries this may not be adjustments. devaluation of the local trigger for non-default
possible due to exchange / interest rate currency to the extent termination. Alternatively it
volatility. that such devaluation could trigger a “cap and collar”
impacts on the economic subsidy arrangement from the
viability of the project Contracting Authority. Issues
(due to the need to pay of convertibility of currency
for foreign currency and restrictions on repatriation
imports and service of funds are also bankability
foreign currency debt). issues upon termination in
emerging markets.

Insurance risk The risk that insurance Developed X Where risks become uninsurable there is As part of the feasibility study The Contracting Authority In developed market
for particular risks is or typically no obligation to maintain the Contracting Authority and should consider whether transactions, as neither party
becomes unavailable. insurance for such risks. Private Partner should consider it stands behind can better control the risk of
If an uninsured risk event occurs, the whether insurance might unavailability of insurance coverage becoming
Contracting Authority may choose to become unavailable for the insurance, in particular unattainable, this is typically a
assume responsibility for the uninsurable project given the location and where this has been shared risk.
risk, while requiring the Private Partner to other relevant factors. caused by in-country or Where the cost of the required
regularly approach the insurance market If an uninsured risk materializes regional events or insurance increases

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 29

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
to obtain any relevant insurance. and the asset is destroyed, the circumstances. significantly, the risk is
If the uninsured risk is fundamental to the Private Partner may need the The Contracting Authority typically shared by either
project (e.g. physical damage cover for Contracting Authority to act as might be reluctant to having an agreed cost
major project components) and the parties insurer of last resort and make accept an obligation to escalation mechanism up to
are unable to agree on suitable payments to the Private Partner. repair the asset in order ceiling or a percentage
arrangements then the Private Partner Alternatively the Contracting to maintain free choice of sharing arrangement - this
may need an exit route (e.g. termination of Authority may either be obliged options. allows the Contracting
the project on the same terms as if it were to finance the repair of the asset Authority to quantify the
an event of force majeure) if it cannot or to terminate the contract. contingency that has been
reinstate the project on an economic priced for this risk.
basis. In circumstances where the
required insurance becomes
unavailable, the Contracting
Authority is typically given the
option to either terminate the
project or to proceed with the
project and effectively self-
insure and pay out in the
event the risk occurs.

Insurance risk The risk that insurance Emerging X Where risks become uninsurable there is As part of the feasibility study The Contracting Authority On emerging market
for particular risks is or typically no obligation to maintain the Contracting Authority and should consider whether transactions, the Contracting
becomes unavailable. insurance for such risks. Private Partner should consider it stands behind Authority typically does not
If an uninsured risk event occurs, the whether insurance might unavailability of take the risk of uninsurability
Private Partner will typically have to bear become unavailable for it given insurance, in particular arising on the project,
this risk. the location and other factors where this has been although there are good
relevant to the project. caused by in-country or grounds to say that it should
If the uninsured risk is fundamental to the regional events or do so if the Private Partner
project (e.g. physical damage cover for circumstances. has no protection for the
major project components) then the consequences of a natural
Private Partner may need an exit route force majeure that becomes
(e.g. force majeure termination) if it cannot uninsurable. It might also be
reinstate the project on an economic more difficult to get insurance
basis. for certain events under
commercially viable
conditions.

Political risk The risk of Government Developed X The Contracting Authority will bear The Contracting Authority will This type of issue will The type of political risk
intervention, responsibility for political events outside outline certain political events as typically lead to a events that occur in
discrimination, seizure the Private Partner’s control, and the delay events, compensation termination event where developed markets are likely
or expropriation of the Contracting Authority will be responsible events excusing causes (relief the Contracting Authority more subdued and less
project. should it fail to continually provide the from payment deductions) that will need to stand behind drastic than emerging
Public sector Private Partner with the license and involve a breach of obligations debt and equity. markets. As such, political risk
budgeting. access to the toll road and surrounding or interference by the insurance is not typically
lands necessary to allow the Private Contracting Authority with the obtained.
Partner to fulfil its obligations. For project. Alternatively, statutory
example, under German law, the Private law may provide for respective
Partner will be secured by virtue of law protection for the benefit of the
against expropriation and discriminating Private Partner.

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 30

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
legislation.
However, the Contracting Authority may
be reluctant to accept relief and
compensation for general changes in law,
since this risk should be with the Private
Partner.

Political risk The risk of Government Emerging X The Contracting Authority typically bears The Contracting Authority must This type of issue will Investors and commercial
intervention, responsibility for political events outside ensure that other Government typically lead to a lenders may also be able to
discrimination, seizure the Private Partner’s control. departments keep in line with termination event where cover themselves by use of
or expropriation of the This concept may include any “material the project objectives and will the Contracting Authority political risk insurance, leaving
project. adverse Government action” (broadly need to actively manage the will need to stand behind this risk to be managed by the
Public sector speaking any act or omission of any various stakeholders in the debt and equity insurer against the
budgeting. Government entity which has a material project to achieve this. potentially with a Contracting Authority.
adverse impact on the Private Partner’s Government guarantee of
ability to perform its obligations and/or the Contracting
exercise its rights under the concession) Authority’s payment
and may also include a specific list of obligations.
events of a political nature such as
expropriation, interference, general
strikes, discriminatory changes in law as
well as more general uninsurable events
such as risks of wars / riots / embargos
etc.
The Private Partner would expect not only
compensatory relief but also an ability to
exit the project if the political risks
continue for an unacceptable duration.

Regulatory/change The risk of law Developed X The risk of change in law falls mostly with Change in law risk that is Past concession models In developed markets, the
in law risk changing and affecting the Contracting Authority but there will be retained by the Private Partner (including that developed Private Partner will not be
the ability of the project a degree of risk sharing in the following may be mitigated by indexation in the UK) used to require compensated for General
to perform and the manner: provisions (on the basis that the Private Partner to Changes and likely will have
price at which The Private Partner will be kept whole in general changes in law will assume, and price for, a less protection than in
compliance with law respect of changes in law which are: (i) affect the market equally and specified level of General emerging countries where
can be maintained. Discriminatory (to the project or the should be reflected in general Change in law capex risk Contracting Authority will be
Change in taxation. Private Partner) (ii) Specific (to the sector inflation). during the operational expected to bear a significant
or to PPP projects in the jurisdiction) or Change in law risk may also be period, before portion of the change in law
(iii) general change in law affecting capital mitigated where there is an compensation would be risk in order to attract private
expenditures. Such protection can be ability to pass back changes in paid. The UK investment. Such risk may be
provided by virtue of statutory law. the tariff charged on the project. Government ultimately heightened in jurisdictions
However, the Private Partner has to take decided that this where the PPP legislation
Some projects only permit the allocation did not allows for a local assembly to
the risk of changes in law and technical Private Partner to claim relief for
standards leading to increased capex to represent value for veto the project.
General Changes in law money and reversed this
the extent such change was foreseeable occurring after completion of
at the time of submission of bid. position. Some countries
construction. This approach may which adopted the SOPC
A change in law is often subject to a de be justified if the country's legal model had already taken
minimis threshold before the Private regime ensures that the this approach.

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 31

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
Partner is entitled to compensation prevailing legal regime at the Accordingly the
The Private Partner may not be start of construction is fixed until Contracting Authority
compensated for general changes in law the works are complete (i.e. should be mindful of how
that only affect operational expenditure or does not operate retrospectively it will fund these changes
taxation (i.e. affect the market equally). to projects in progress). should they arise.
Changes in law will always entitle the
Private Partner to relief where this is
necessary to avoid an impossible
obligation. The Contracting Authority often
has to consent to such Variation if the
Private Partner is obliged to comply with
the change in law.

Regulatory/change The risk of law Emerging X The Contracting Authority typically bears The Contracting Authority will Some projects may also In emerging markets, the
in law risk changing and affecting principal responsibility for changes in law need to ensure that various provide for a stabilization Private Partner is likely to
the ability of the project post-bid / post-contract signature. Government departments keep clause that entrenches have a greater level of
to perform and the There may be a degree of risk sharing the project in mind when passing certain legal positions protection from changes in
price at which with the Private Partner and there may be new laws to ensure that the (such as the current tax law to reflect the greater risk
compliance with law certain risks that the Private Partner is Private Partner is not regime) against any of change (including both
can be maintained. expected to bear alongside the remainder inadvertently affected. future changes in law. likelihood and consequences)
Change in taxation. of the market. The various Government This may require a level and in order to attract
departments that may impact on of parliamentary investors to the project. In that
The Private Partner would look to be ratification of the way, the Contracting Authority
made whole in respect of changes of law the project should therefore be
cognisant of the risk allocation in concession agreement. would be expected to assume
which are discriminatory (towards the more change in law risk than
project or the Private Partner), or specific the project when passing laws However, the stabilization
and regulations that may have method is generally not compared to a project in a
(to the transport sector). developed market.
an impact on it. favoured by Governments
The Private Partner may also receive or NGOs (e.g. because of
protection against other (general) changes the concept of Private
in law, however the level of protection will Partner immunity from
reflect the Private Partner’s ability to updates to environmental
mitigate this risk (through the tariff or laws, for example).
inflation regime, if applicable) and whether
the risk is of general application to the
market (e.g. an increased tax on
corporate tax or dividends across the
board). It may also be appropriate for the
Private Partner to bear a certain financial
level of risk before compensation
becomes payable, to ensure that claims
are only made for material changes in
circumstances.
Changes in law should always entitle the
Private Partner to a variation where this is
necessary to avoid an impossible
obligation, or otherwise should give rise to
a right to terminate (typically on a
Contracting Authority default basis).

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 32

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Inflation risk The risk that the costs Developed X Inflation risks during construction are During the concession term, the The payment mechanism In developed markets,
of the project increase typically borne by the Private Partner, Private Partner will look to be may account for inflation inflation is typically minimal
more than expected. while inflation risks during the concession kept neutral in respect of both costs by incorporating the and does not experience
term will typically be primarily borne by the international and local consumer price index into fluctuations to the extent of
Contracting Authority. inflationary costs through the monthly payments. emerging markets.
On availability-based projects, during the respective agreements with its
concession term, the availability payment subcontractors.
will typically include both a fixed
component (where debt has been
hedged) and a variable component that
will include an escalation factor that
accounts for rises in costs as defined by
the consumer price index.
Demand risk projects also need the ability
to increase the tolls, but this ability may
often be restricted (as toll-raising is likely
to be a sensitive political issue), and so
the Private Partner may need additional
Contracting Authority support.

Inflation risk The risk that the costs Emerging X Inflation risk is typically borne by the The Private Partner will look to The Contracting Authority The fluctuation of inflationary
of the project increase project user (on demand-risk projects) or be kept neutral in respect of both may need to provide a costs is a greater risk in
more than expected. the Contracting Authority (on availability- international and local subsidy to the Private emerging markets than it is in
based projects). inflationary costs through Partner on demand risk developed markets and the
On availability-based projects the appropriate inflation uplift or tariff projects if users cannot Private Partner’s expectation
availability payment will typically include adjustment regime albeit there is bear the cost increase. It will be that this risk is borne
both a fixed component (where debt has always a time lag in how quickly will be more crucial than and managed by the
been hedged) and a variable component the indexation price increase is in developed markets to Contracting Authority during
(to reflect variable financing costs and available to the Private Partner. find appropriate indicators the concession term.
variable inputs such as staff and mirroring the project
materials). needs rather than a
general CPI.
Demand risk projects also need the ability
to increase the tolls, but this ability may
often be restricted (as toll-raising is likely
to be a sensitive political issue), and so
the Private Partner may need additional
Contracting Authority support.

Strategic risk Change in Developed X Contracting Authority wants to ensure that Contracting Authority will limit In developed markets the
shareholding of Private the Private Partner to whom the project is Private Partner’s ability to Private Partners’ desire for
Partner. awarded remains involved. change shareholding for a certainty of involvement of key
Conflicts of interest Bid awarded on basis of Private Partner’s period (i.e. lock-in for participants will need to be
between shareholders technical expertise and financial construction period) and balanced with the private
of Private Partner. resources therefore sponsors should thereafter may impose a regime sector’s requirements for
remain involved. restricting change in control flexibility in future business
without consent or where pre- plans, particularly in the equity
agreed criteria cannot be met. investor markets and the
Pre-tender proposal should set added benefits of allowing

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 33

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
out proposals for governance of capital to be ‘recycled’ for
Private Partner. future projects.

Strategic risk Change in Emerging X Contracting Authority wants to ensure that Contracting Authority will limit In emerging markets, there is
shareholding of Private the Private Partner to whom the project is Private Partner’s ability to typically more restriction on
Partner. awarded remains involved. change shareholding for a Private Partner’s ability to
Conflicts of interest Bid awarded on basis of Private Partner’s period (i.e. lock-in for restructure or change
between shareholders technical expertise and financial construction period plus ramp up ownership, although very
of Private Partner. resources therefore sponsors should phase of operation). restrictive provisions may
remain involved. Pre-tender proposal should set deter investment.
out proposals for governance of
Private Partner.

Disruptive The risk that a new Developed X The Contracting Authority may consider The Private Partner will seek to
technology risk emerging technology imposing obligations on the Private mitigate potential exposure
unexpectedly displaces Partner to adopt and/or integrate with new through agreed cost and
an established tolling technologies or to allow for other improvement parameters,
technology used in the foreseeable developments, such as beyond which they will be
toll road sector. driverless cars. entitled to relief as a variation.

Disruptive The risk that a new Emerging X The Contracting Authority may consider The Private Partner will seek to
technology risk emerging technology imposing obligations on the Private mitigate potential exposure
unexpectedly displaces Partner to adopt and/or integrate with new through agreed cost and
an established tolling technologies or to allow for other improvement parameters,
technology used in the foreseeable developments, such as beyond which they will be
toll road sector. driverless cars. entitled to relief as a variation.

Early termination The risk of a project Developed X The level of compensation payable on A key mitigant is to make sure The lenders will require Early termination
(including any being terminated early termination will depend on the the termination triggers are not direct agreements/tri- compensation is well defined
compensation) risk before the expiry of reasons for termination and typically for: hair triggers and that there are partite agreements with and political risk insurance is
time and the monetary (1) Contracting Authority default – the adequate well-defined routes for the Contracting Authority not typically obtained due to a
consequences of such Private Partner would get senior debt, each party to remedy any giving the lenders step-in lesser risk of the Contracting
termination. junior debt, equity and a level of equity alleged default. rights in the case of the Authority defaulting on its
return; the compensation of equity might While project lenders are Contracting Authority payment obligations.
be limited to an amount calculated as net therefore exposed to a project calling a default
capitalised earnings at the time of default, they are secured by termination or in the
termination. step-in rights which entitle them event of the Private
to step into the contract with the Partner being in default
(2) Non-default termination – the Private under the loan
Partner would get senior debt and equity Contracting Authority. Further, in
the event of a termination due to documentation. The
return; Senior debt might participate in the lenders would typically be
risk by being not compensated in full and no parties’ default the equity
compensation serves as a given a grace period to
equity compensation might be limited to gather information,
an amount calculated as net capitalised buffer.
manage the project
earnings at the time of termination; and The Private Partner will also company and seek a
(3) Private Partner default – the Private mitigate risks by appropriately resolution or ultimately
Partner would typically be entitled to an allocating such risks to novate the project
amount equal to a pre-set percentage appropriate subcontractors. documents to a suitable
(around 70- 85%) of the scheduled substitute concessionaire.
outstanding debt, minus damage claims of

SIN-#7991991-v10
Risk Matrix 1: Toll road (DBFO) 34

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
the Contracting Authority, with no equity
compensation. Alternatively, the
(assumed) price for the concession from a
(deemed) retendering of the concession
minus any damages and costs for early
termination and retendering might be paid

Early termination The risk of a project Emerging X The level of compensation payable on A key mitigant is to make sure The covenant risk of the In emerging markets, there
(including any being terminated early termination will depend on the the termination triggers are not Contracting Authority may may also be sovereign
compensation) risk before the expiry of reasons for termination and typically for : hair triggers and that there are require a guarantee from guarantees which support the
time and the monetary (1) Contracting Authority default – the adequate well-defined routes for a higher level of Contracting Authorities
consequences of such Private Partner would get senior each party to remedy any Government to guarantee payment obligations.
termination. debt, equity and a level of equity alleged default. the level of compensation Political risk insurance may be
return; The Private Partner will mitigate payable on termination. available and is likely to be
(2) Non-default termination – the Private risks by appropriately allocating The lenders will require sought to cover the risk of the
Partner would get senior debt and such risks to appropriate direct agreements with Contracting Authority or
equity; and subcontractors. the Contracting Authority Government guarantor
giving the lenders step-in defaulting on its payment
(3) Private Partner default – the Private rights in the case of the obligation.
Partner would typically get a Contracting Authority
payment that is a function of the calling a default
input cost of the project (construction termination or in the
value / book value) or the event of the Private
outstanding senior debt. Partner being in default
In many emerging markets it is common under the loan
for the senior debt to be guaranteed as a documentation. The
minimum in every termination scenario, lenders would typically be
and for rights of set-off below that figure to given a grace period to
be restricted. While it may seem that gather information,
project lenders therefore not significantly manage the project
exposed to a project default, they would company and seek a
not typically have the right to call for a resolution or ultimately
termination in these circumstances, and novate the project
so they are still motivated to make the documents to a suitable
project work to recover their loan if the substitute concessionaire.
Contracting Authority chooses not to
exercise its termination rights.

SIN-#7991991-v10
Risk Matrix 2: Airport (DBFO) 35

Risk Matrix 2: Airport (DBFO)


 A new greenfield airport project, developed as a DBFO transaction
 Operations include landside and airside services
 Customs, passport and air traffic control remain public sector obligations
 Key risks
 Completion (including delay and cost overrun) risk
 Demand risk
 Force majeure risk

SIN-#7991991-v10
Risk Matrix 2: Airport (DBFO) 36

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Land purchase The risk of acquiring Developed X The Contracting Authority bears the The Contracting Authority should The Contracting Authority Land rights and ground
and site risk title to the land to be principal risk as it is best placed to select undertake detailed may need to use its conditions in developed
used for a project, the and acquire the required land interests for environmental and social legislative powers to markets are typically more
selection of that site the project. assessments and should secure the site (e.g. established and risks can be
and the geophysical The Contracting Authority would generally disclose such information to the through expropriation / mitigated with appropriate due
conditions of that site. be responsible for providing a “clean” site, Private Partner as part of the compulsory acquisition). diligence with relevant land
Planning permission. with no restrictive land title issues, and bidding process. The Even where you have a registries and utility records.
existing utilities and contamination either Contracting Authority may itself legally clear site, The Private Partner’s
Access rights. conduct detailed ground surveys
dealt with or extensively surveyed and Government enforcement obligations with regards to
Security. warranted or, in the case of utilities to be or leave this to the preferred powers may be needed to indigenous rights are
provided near to the time of completion, if bidder. However, in the case of properly secure the site generally well legislated in
Archaeological
state owned or capable of influence. The the preferred bidder conducting for the private sector. developed markets, for
Existing pollution. its own detailed survey this may
Private Partner may take some risk for There may be historic example requirement to enter
Noise. dealing with adverse conditions revealed lead to a charge in price. encroachment issues that into indigenous land use
by surveys but other unforeseeable The Contracting Authority the Private Partner cannot agreements under native title
ground risks (e.g. archaeological risks or should, to the greatest extent be expected to deal with. legislation in Australia and the
munitions) are likely to need to be held by possible, ensure that it has a Examples include the equivalent under first nations
the Contracting Authority. complete understanding of the need to manage the law in Canada.
The Contracting Authority should also risks involved in securing the site relocation of people (e.g.
consider the impact that the project will and the site constraints that will the removal of informal
have on neighbouring properties and impact on the construction and housing or businesses)
trades and may need to retain this risk of operation of the system. and continued efforts to
unavoidable interference particularly in the The Contracting Authority should manage the social and
case of noise and air pollution. also manage any indigenous political impact of the
land rights issues that may project on and around the
impact on the use of the site. site. If the effect of
Prior to awarding the tender the increased costs or air
Contracting Authority should (in pollution is increased the
view of the sensitivity of airport state or local authorities
development), through may need to relocate
legislation and a proper people or pay
consultation process, limit the compensation.
ability for potential land right The Contracting Authority
owners or neighbouring may be required to
properties and trades to raise provide additional site
claims on the land and/or for security / assistance
injurious affection , in particular, during operations to
noise and air pollution. manage this risk.
However, in the case of
large scale
demonstrations and
criminal actively, this will
need to be carried out by
state security.

Land purchase The risk of acquiring Emerging X The Contracting Authority bears the The Contracting Authority should The Contracting Authority Land rights and ground
and site risk title to the land to be principal risk as it is best placed to select undertake detailed ground, may need to use its conditions (in particular
used for a project, the and acquire the required land interests for environmental and social legislative powers to reliable utilities records, and

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
selection of that site the project. assessments and should secure the site (e.g. land charges) in emerging
and the geophysical The Contracting Authority would generally disclose such information to the through expropriation / markets may be less certain
conditions of that site. be responsible for providing a “clean” site, Private Partner as part of the compulsory acquisition). than in developed markets
Planning permission. with no restrictive land title issues, and bidding process. The Even where you have a where established land
existing utilities and contamination either Contracting Authority may itself legally clear site, registries and utility records
Access rights. conduct detailed ground surveys exist.
dealt with or fully surveyed and warranted. Government enforcement
Security. Existing assets proposed to be used in the or leave this to the preferred powers may be needed to In the absence of legislation in
project should also be fully surveyed and bidder. However, in the case of properly secure the site emerging markets, indigenous
Archaeological
warranted. The Private Partner may take the preferred bidder conducting for the private sector. land rights issues and
Existing pollution. its own detailed survey this may
some risk for dealing with adverse There may be historic community engagement can
Noise. conditions revealed by surveys but other lead to a charge in price. encroachment issues that be managed by the
unforeseeable ground risks (e.g. The Contracting Authority the Private Partner cannot Contracting Authority through
archaeological risks) are likely to need to should, to the greatest extent be expected to deal with. the adoption of IFC
be held by the Contracting Authority. possible, ensure that it has a Examples include the Safeguards for the project,
The Contracting Authority should also complete understanding of the need to manage the particularly in order to ensure
consider the impact that the project will risks involved in securing the site relocation of people (e.g. international financing options
have on neighbouring properties and and the site constraints that will the removal of informal are available to the project.
trades and may need to retain this risk of impact on the construction and housing or businesses) See comments on
unavoidable interference. operation of the system. and continued efforts to “Environmental and Social
The Contracting Authority should manage the social and Risk” for an airport project in
We have seen the contrary position emerging markets.
adopted in an equivalent PPP project in also manage any indigenous political impact of the
Colombia, the land purchase and site risks land rights issues that may project on and around the
are typically allocated within the Private impact on the use of the site. site.
Partner risks. It must undertake at least, Prior to awarding the tender the The Contracting Authority
and not necessarily limited to: i) the land Contracting Authority could may be required to
purchase (including the direct agreement (through legislation and a proper provide additional site
with owners or title holders and, if consultation process) limit the security / assistance
necessary, initiating expropriation ability for potential land right during operations to
procedures); ii) the submission until its owners or neighbouring manage this risk.
issuance of all the necessary properties and trades to raise However, in the case of
environmental permits and licences, claims on the land and/or for large scale
including water, air, noise and waste injurious affection, in particular demonstrations and
management; iii) the previous consultation noise and air pollution. criminal actively, this will
process with communities whenever there need to be carried out by
is a “titled community” (eg. Indigenous, state security.
afro-descendants or constitutionally
protected tribes, communities or
settlements); iv) the acquisition and
arrangement of public services provision
to the infrastructure; v) Planning and
designs approval before the competent
municipal or regional authority for any
works on the land; vi) provision of private
security for better control and safety of the
infrastructure (although the police and
army security work is public). For the case
of archaeological findings the risk is
shared. The Private Partner assumes all

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
the future loss of income earnings derived
from archaeological findings, including
mineral mines or other deposits or fields,
while the Public Partner assumes the
direct loss (damnum emergens) derived
from those same findings. The allocation
of this risk may depend on whether the
Contracting Authority had secured a site
and/or whether a project is unsolicited.

Environmental The risk of the existing Developed X The Private Partner will have primary The Contracting Authority should The Contracting Authority Environmental scrutiny is
and social risk latent environmental responsibility to accept the project site in conduct the necessary due will need to take increasing even in developed
conditions affecting the an “as is” condition, subject to the diligence in order to ascertain meaningful steps both markets, as both Private
project and the Contracting Authority’s disclosure of the environmental fitness of the before and during the Partners and Contracting
subsequent risk of relevant matters, and manage the site and disclose all known project to manage social Authorities have come under
damage to the environmental and social strategy across environmental issues to the impacts of construction increasing burdens to develop
environment or local the project, as well as obtaining all Private Partner. However, this and operation. sound environmental and
communities required licenses, permits and may be carried out in more detail social risk management plans
authorisations as necessary. by the Private Partner once it is before construction begins.
Existing environmental risks of the site appointed preferred bidder. Airports are major pieces of
prior to the Private Partner’s acceptance The Contracting Authority will be general infrastructure with
of the site that have not been disclosed or required to review all particular problems of noise
within the knowledge of the Private environmental and social plans and air pollution affecting local
Partner prior to commercial close will be put forth by the Private Partner, communication.
deemed to be the responsibility of the to ensure that such plans will be
Contracting Authority. This is on the adequate to appropriately
assumption that the Private Partner has manage the risks of the project.
had the opportunity to carry out its own Lenders will expect to see a plan
environmental survey and has done so. to see how these aspects are
See comments on “Land purchase and dealt with and that these comply
site risk” for an airport project in with the Equator Principles (if
developed markets. applicable to the project).
Social risks, insofar as they may involve Certain investors, such as DFIs,
indigenous groups, will be the will have their own requirements
responsibility of the Contracting Authority. for environmental and social
The Contracting Authority may also need plans. In particular in relation to
to retain responsibility for social impacts noise pollution and will require
which are unavoidable from the that these are provisions in
development of the project (e.g. agreements that will lead to
compensation for expropriation of remediation or mitigation.
indigenous land rights and/or relocation of
urban communities / businesses).

Environmental The risk of the existing Emerging X The Private Partner will have primary Government will need to International lenders and
and social risk latent environmental responsibility to manage the take meaningful steps development finance
conditions affecting the environmental and social strategy across both before and during institutions are particularly
project and the the project; however existing the project to manage sensitive about environmental
subsequent risk of environmental conditions which cannot be social impacts of and social risks, as a result of
damage to the adequately catered for or priced may need construction and their commitment to the

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
environment or local to be retained by the Contracting operation. Equator Principles and their
communities Authority. Investors and lenders own policies. They will look
The Contracting Authority may also need may expect to see a plan very closely at how these risks
to retain responsibility for social impacts to see how these aspects are managed at both private
which are unavoidable from the are dealt with and this and public sector level and
development of the project (e.g. may need to be this scrutiny is helpful to
compensation for expropriation of contractualised. mitigate the risks posed by
indigenous land rights and/or relocation of these issues.
urban communities / businesses).

Design risk The risk that the project Developed X Because an airport is either a national or A detailed design review process Developed market airport
has not been designed local matter of pride and importance the will allow for increased dialogue projects benefit from stable
adequately for the Contracting Authority may have hired a and cooperation between the resource availability and
purpose required. leading firm of architects to design the Contracting Authority and the defined design standards
Approval of detailed airport and to provide the outline Private Partner; however the which allow for increased
designs. specification. In these circumstances the mutual review process should innovation and productivity
Private Partner will be required to adopt not be construed as a reduction gains. The quality of the
Changes to design. the outline design and to provide detailed or limitation of the Private information provided by the
design that fits in with this, whilst still Partner’s overall liability. Contracting Authority and
ensuring that the airport will comply with The detailed design review limited ability to verify such
the output specifications set by the process should not be too data can also hinder the
Contracting Authority. prescriptive because if it is then Private Partner’s ability to
The Contracting Authority may retain the benefits of providing for unconditionally take full design
some design risk in certain aspects of the private sector innovation and risk.
system or related works, depending on efficiency gains in the design will
how prescriptive the Contracting Authority be diminished.
is in the output specification. In addition, if the detailed design
If the output specification is too review and approval process is
prescriptive (e.g. the terminal design too lengthy it can lead to delays
constrains the efficiency of the design or in construction which may
the throughput of passengers) the Private ultimately impact upon the
Partner’s ability to warrant the fitness for achievement of milestones by
purpose of its design solution may be targeted dates. This can also be
impacted, and the Contracting Authority the case if the Contracting
will to that extent share in the design risk. Authority seeks to amend the
outline specifications (or
previously approved detailed
design) which can lead to both
delays and additional cost of the
necessary changes to detailed
design.

Design risk The risk that the project Emerging X The Private Partner will have principal The Contracting Authority may
has not been designed responsibility for adequacy of the design wish to consider how
adequately for the of the system and its compliance with the prescriptive it should be in the
purpose required. output / performance specification. output specification. It may wish
Approval of detailed The Contracting Authority may retain to request a degree of
designs. some design risk in certain aspects of the cooperation and feedback during
system or related works, depending on the bidding phase to ensure that

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
Changes to design. how prescriptive the Contracting Authority the bidding consortia’s
is in the output specification. expectations in terms of an
If the output specification is too appropriate risk allocation for
prescriptive (e.g. the terminal design design responsibility are taken
constrains the efficiency of the design or into account when finalising the
the throughput of passengers) the Private output specification.
Partner’s ability to warrant the fitness for The detailed design review
purpose of its design solution may be process should not be too
impacted, and the Contracting Authority prescriptive because if it is then
will to that extent share in the design risk. the benefits of providing for
Delay in approving designs would typically private sector innovation and
be a Contracting Authority risk. efficiency gains in the design will
be diminished.
In addition, if the detailed design
review and approval process is
too lengthy it can lead to delays
in construction which may
ultimately impact upon the
achievement of milestones by
targeted dates. This can also be
the case if the Contracting
Authority seeks to amend the
outline specifications (or
previously approved detailed
design) which can lead to both
delays and additional cost of the
necessary changes to detailed
design.

Construction Labour dispute. Developed X The Private Partner assumes project Ensuring that the programme for The Contracting Authority In developed markets risk is
risk Interface/ project management risk unless certain work is completion of the works has may have a critical role to considered manageable
management. dependent on Contracting Authority sufficient float periods for all play at stages of the through robust pass through
Commissioning work/related infrastructure work being critical stages and that parties construction, testing and of obligations to credible and
damage. completed in which case risk could be are incentivised to work together commissioning process in experienced subcontractors
shared. to achieve the common terms of ensuring that any and by appropriate timetable
Intellectual property deadlines may is an effective rights that it has to and budget contingency.
breach / infringement. The Private Partner takes labour dispute
risk unless such labour disputes are strategy. comment on design
Quality assurance political in nature or, in some jurisdictions, The Private Partner will seek to development and testing
standards. nationwide. mitigate by appropriately results does not adversely
allocating risks to the relevant delay the project.
Defects. The Private Partner also takes
Subcontractor insolvency risk or the risk of subcontractors and may agree Similarly the Contracting
Subcontractor
a dispute with its Subcontractor causing on a lump sum price with Authority may need to
disputes/insolvency.
delay. subcontractors in order to take responsibility for
Cost overruns where no exclude or limit the risk of cost delays caused by failure
compensation /relief The Private Partner takes the risk of IP overrun. of public bodies to issue
event applies. right infringement. necessary consents in
The Private Partner is required to design good time.
and construct to good industry practice
standards and may be required to comply

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
with or develop other quality assurance
programmes or standards.
The Private Partner will generally have an
obligation to rectify defects/defective work.
There may be some sharing of risk in
respect of latent defects (for example, in
existing assets or where due to the nature
of the site it is not reasonable to expect
the Private Partner to assess this risk prior
to contract award).
The Private Partner takes risk of cost
overruns where no compensation or relief
event regime applies.

Construction Labour dispute. Emerging X The Private Partner assumes project Ensuring that the programme for The Contracting Authority The Contracting Authority will
risk Interface/project management risk unless certain work is completion of the works has may have a critical role to need to be prepared to
management. dependent on Contracting Authority sufficient float periods for all play at stages of the enforce its rights to manage
Commissioning work/related infrastructure work being critical stages and that parties construction, testing and the consequences of a failure
damage. completed in which case the construction are incentivised to work together commissioning process in by the Private Partner to meet
risk could be shared. to achieve the common terms of ensuring that any the construction milestones. In
Intellectual property deadlines may is an effective rights that it has to an emerging market context
breach / infringement. The Private Partner takes labour dispute
risk unless such labour disputes are strategy. comment on design the dynamics may be different
Quality assurance political in nature or, in some jurisdictions, The Private Partner will seek to development and testing if the lenders have a
standards. nationwide. mitigate by appropriately results does not adversely significant underwrite of their
allocating risks to the relevant delay the project. senior debt.
Defects. The Private Partner also takes
Subcontractor insolvency risk or the risk of subcontractors and may agree Similarly the Contracting
Subcontractor
a dispute with its Subcontractor causing on a lump sum price with Authority may need to
disputes/insolvency.
delay. subcontractors in order to take responsibility for
Cost overruns where no exclude or limit the risk of cost delays caused by failure
compensation /relief The Private Partner takes the risk of any overrun. of public bodies to issue
event applies. IP right infringement. necessary consents in
The Private Partner is required to design good time.
and construct to good industry practice
standards and may be required to comply
with or develop other quality assurance
programmes or standards.
The Private Partner will generally have an
obligation to rectify defects/defective work.
There may be some sharing of risk in
respect of latent defects (for example, in
existing assets or where due to the nature
of the site it is not reasonable to expect
the Private Partner to assess this risk prior
to contract award).
The Private Partner takes risk of cost
overruns where no compensation or relief
event regime applies.

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Completion The risk of Developed X The Private Partner will bear principal The combination of (i) incentives The Contracting Authority In developed markets,
(including delay commissioning the responsibility for delay and cost overrun or penalties for timely completion may have a critical role to enforcement of construction
and cost asset on time and on risk, and will typically manage this through and (ii) the implementation of a play at stages of the deadlines and budgets may
overrun) risk budget and the the engagement of a suitable EPC “longstop date” (a date which is construction, testing and be easier as the Private
consequences of contractor. pegged to a prescribed time commissioning process in Partner will typically have
missing either of those The principal risk arising out of delay will period after the scheduled terms of ensuring that any more experience and reliable
two criteria. be the loss of expected revenue, the completion date) will create the rights that it has to resources.
ongoing costs of financing construction necessary tension to incentivise comment on design
and extended site costs. timely completion while allowing development and testing
the Private Partner a reasonable results do not adversely
The Private Partner is best placed to amount of time to meet its delay the project.
integrate complex civil works, the delivery, contractual responsibilities in
integration and commissioning of the The Contracting Authority
spite of delays before the may allow for certain relief
systems and machinery at the airport, Contracting Authority can
despatching and operations, and events, delay events,
terminate the project. compensation events or
preventative and lifecycle maintenance to
ensure a reliable and punctual service for Insurance will be taken out by force majeure events
an efficient price. This may be managed the Private Partner that will where delays or cost
through a single EPC joint venture or by compensate it in a number of overruns have arisen from
the Private Partner managing a series of circumstances where it is not either the fault of the
works, supply and entitled to compensation for Contracting Authority, or
operation/commissioning contracts. extra costs (including liquidated no-fault events. The type
damages) and loss of revenue of event will be relevant in
The Private Partner will be expected to from the Contracting Authority. relation to whether the
demonstrate adequate system Private Partner is entitled
performance before it is given permission to just relief from
to operate the system. Airport projects termination, extra time to
require complex commissioning and achieve completion or
testing regimes given the intricacies compensation for
involved in ensuring that the check-in, additional costs or loss of
customs, baggage handling and the wider revenues due to the
system will meet the necessary reliability specific event.
and punctuality and throughput
requirements of the output specifications. Similarly the Contracting
Authority may need to
Many DBFO airport projects provide for take responsibility for
the Private Partner to pay a periodic fixed delays caused by the
and a variable concession fee (often failure of public bodies to
based on gross revenue) to the issue necessary consents
Contracting Authority. In airport PPP in good time.
projects in Colombia, for those
concessions which have royalties in Transport to and from the
favour of the Contracting Authority, such new airport is usually
royalty is standardized as a fixed extremely important and if
percentage of a determined income of the the state is providing new
Private Partner (eg. Gross Income). If the road or rail links to the
project is late in achieving completion then airport the Private Partner
the Contracting Party will not receive the will need this to be
expected concession fees from the provided on time for the
expected date. Therefore the Contracting opening or by a specific
Party will often seek to impose liquidated time thereafter if a build-

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
damages on the Private Partner to up of traffic at the airport
compensate the Contracting Authority for is envisaged that will
its loss. necessitate such link(s)
being provided at a later
date.

Completion The risk of Emerging X The Private Partner will bear principal It may be difficult for the Private The Contracting Authority Some emerging market airport
(including delay commissioning the responsibility for delay and cost overrun Partner to mitigate these may have a critical role to projects have faced significant
and cost asset on time and on risk, and will typically manage this through integration risks solely through play at stages of the construction issues and the
overrun) risk budget and the the engagement of a suitable EPC contractual risk allocation, as the construction, testing and Contracting Authority will need
consequences of contractor. financing cost / lost revenue commissioning process in to be prepared to enforce its
missing either of those The principal risk arising out of delay will impact is typically very high terms of ensuring that any rights to manage the
two criteria. be the loss of expected revenue, the compared to the individual rights that it has to consequences of a failure by
ongoing costs of financing construction component parts of the project comment on design the Private Partner to meet
and extended site costs. In addition to that can affect this. Ensuring development and testing the construction milestones.
those risks, in Colombian PPP projects, that the programme has results does not adversely The role of lenders and their
the Private Partner will typically be subject sufficient float periods for all delay the project. advisers are important gauge
to fines for delayed works, and even could critical stages and that parties The Contracting Authority for a Contracting Authority – if
be subject to trigger an event of default are incentivised to work together may allow for certain relief lenders accept the completion
which may lead to the administrative to achieve the common events, delay events, risk profile.
lapsing of the contract. deadlines may be more effective compensation events or
strategies, particularly in markets force majeure events
The Private Partner is best placed to where this may be the first time
integrate complex civil works, the delivery, where delays or cost
an asset of this nature has been overruns have arisen from
integration and commissioning of the procured.
systems and machinery at the airport and either the fault of the
operations, and preventative and lifecycle Contracting Authority, or
maintenance to ensure a reliable and no-fault events. The type
punctual service for an efficient price. This of event will be relevant in
may be managed through a single EPC relation to whether the
joint venture or by the Private Partner Private Partner is entitled
managing a series of works, supply and to just relief from
operation/commissioning contracts. termination, extra time to
achieve completion or
The Private Partner will be expected compensation for
demonstrate adequate system additional costs or loss of
performance before it is given the permit revenues due to the
to operate the system. Airport projects specific event.
require complex commissioning and
testing regimes given the intricacies Similarly the Contracting
involved in ensuring that the check in Authority may need to
customs, baggage handling and the wider take responsibility for
system will meet the necessary reliability delays caused by failure
and punctuality and through put of public bodies to issue
requirements of the Output Specification. necessary consents in
good time.
Many DBFO airport projects provide for
the Private Partner to pay a periodic fixed
and a variable concession fee (often
based on gross revenue) to the
Contracting Authority. If the project is late

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
in achieving completion then the
Contracting Party will not receive the
expected concession fees from the
expected date. Therefore the Contracting
Party will often seek to impose liquidated
damages on the Private Partner to
compensate the Contracting Party for their
loss.

Performance/ The risk that the project Developed X The Private Partner bears the risk of The onus falls upon the Where certain In developed markets, the
price risk is able to achieve the meeting the performance specification and Contracting Authority to draft performance indicators Contracting Authority should
output specification for the other risks specified (see in relation attainable standards based on cannot be met due to have access to various data
metrics and the price or to Expansion). relevant market data and policy actions by the Contracting sources to develop realistic
cost of doing so. The Contracting Authority is responsible objectives. Performance based Authority or unforeseen and attainable performance
Damage pollution for enforcing the regime and for ensuring on passenger waiting times and circumstances, the specifications and models.
accidents. that the output specifications are properly throughput and quality of service Private Partner may be
tailored to what the Private Partner can can be measured against pre- eligible to seek relief or
Meeting handback determined schedules or compensation. These
requirements deliver. Consideration needs to be given
to the ability of the Private Partner to standards. would include insufficient
Vandalism. achieve the necessary performance The trigger for airport expansion resources provided for
levels, and the appropriateness of metrics should be forward looking and customs or border checks
Equipment becoming
given the nature of the project. based on upward trends in which leads to slower
prematurely obsolete.
passenger numbers over a movement through the
Expansion. Often the Contracting Authority wishes to airport or air traffic
provide for expansion of the airport in number of years. The trigger
should not just be one year (or a controllers strikes (such
order to provide for an increase in as in France every
passengers and/or aircraft movements. couple of years) if this is
potentially unsustainable. The summer). These cause
This may involve an expansion of existing flight cancellations not
terminal(s), a new terminal or an expansion will need to lead to a
demonstrable increase in airport just at the affected airport
additional runway. The Contracting but at other airports in
Authority may require that the Private revenues that will be capable of
paying operating costs, allowing other countries.
Partner is obliged to carry out the
expansion. The Private Partner will only debt service (with a margin
agree to carry out the expansion if it can above joint servicing debt in
be justified and the Private Partner will not order to justify lenders’
lose money or not be able to service its requirements for the Private
existing debt (if the airport has been Partner to meet ratio
project financed) plus any additional debt requirements) as a return on
to be taken on to finance the expansion. investment for the Private
Partner.

Performance/ The risk that the asset Emerging X The Private Partner bears the risk of The Private Partner may need to Where certain For emerging markets,
price risk is able to achieve the meeting the performance specification and require the Contracting Authority performance indicators particularly in the case of
output specification the other risks specified (but see in to reduce the performance cannot be met due to market first projects, the
metrics and the price or relation to Expansion). requirements during the settling actions by the Contracting preparation of attainable
cost of doing so. The Contracting Authority bears the risk of in period and possibly readjust Authority or unforeseen standards by the Contracting
Damage pollution enforcing the regime and for ensuring that the performance metrics once circumstances, the Authority is complicated by the
accidents. the output specification is properly tailored the performance of the project Private Partner may be lack of relevant market data.
to what the Private Partner can deliver. has settled down. This would eligible to seek relief or
Meeting handback mitigate the risk of long-term compensation. These
requirements Consideration needs to be given to the would include insufficient

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Risk Matrix 2: Airport (DBFO) 45

Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
Vandalism. ability of the Private Partner to achieve the performance failure. resources provided for
Equipment becoming necessary performance levels given the The onus falls upon the customs or border checks
prematurely obsolete. nature of the project and the emerging Contracting Authority to draft which leads to slower
market in which it will be based. attainable standards based on movement through the
Expansion. airport or air traffic
Often the Contracting Authority wishes to relevant market data and policy
provide for expansion of the airport in objectives. Performance based controllers strikes (such
order to provide for an increase in on passenger waiting times and as in France every
passengers and/or aircraft movements. throughput and quality of service summer). These cause
This may involve an expansion of existing can be measured against pre- flight cancellations not
terminal(s), a new terminal or an determined schedules or just at the affected airport
additional runway. The Contracting standards. but at other airports in
Authority may require that the Private other countries.
The trigger for airport expansion
Partner is obliged to carry out the should be forward looking and
expansion. The Private Partner will only based on upward trends in
agree to carry out the expansion if it can passenger numbers over a
be justified and the Private Partner will not number of years. The trigger
lose money or not be able to service its should not just be one year (or a
existing debt (if the airport has been couple of years) if this is
project financed) plus any additional debt potentially unsustainable. The
to be taken on to finance the expansion. expansion will need to lead to a
In Colombian PPP projects, in cases of demonstrable increase in airport
International Armed Conflicts, terrorist revenues that will be capable of
acts, civil war, coups d’état, national or paying operating costs, allowing
regional strikes there is shared risk (as for debt service (with a margin
the archaeological risk), the Private above joint servicing debt in
Partner assumes the future loss of income order to justify lenders’
earnings derived from those situations requirements for the Private
while the Public Partner assumes the Partner to meet ratio
direct loss (damnum emergens). requirements) as a return on
investment for the Private
Partner.

Resource or The risk that the supply Developed X The Private Partner bears the principal The Contracting Authority will be Developed markets generally
input risk of inputs or resources responsibility to ensure an uninterrupted allowed to monitor the supply of do not experience market
required for the supply of inputs/resources for the project required resources, and may volatility to the extent of
operation of the project and to manage the costs of those inputs. allow for the Private Partner to emerging markets, and
is interrupted or the The management of costs is particularly substitute resources if resource availability is less of
cost increases. important where the Private Partner is necessary. a concern; however energy
paying a periodic variable concession fee Some of the cost risk can be costs may still vary
to the Contracting Authority based on managed on demand-risk significantly over the course of
gross, rather than net, revenue. projects, such as airports, by project that must be
passing the risk through to the accounted for.
Therefore any increase in costs will not
decrease the amount payable to the user by way of increases in
Contracting Party (possibly with some airport duties or other charges to
limited exceptions such as increases in airlines or users. However, the
tax or the pass through costs of utilities to ability to do this may be limited
airport users such as police, customs, air as airport projects tend to be
traffic control, etc.) but will reduce the demand elastic (i.e. costs to
airlines go up so they reduce

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
amount available to pay the other costs of flights to the airport and the
operations, service debt and provide a revenue goes down).
return to the Sponsors.

Resource or The risk that the supply Emerging X The Private Partner bears the principal The Contracting Authority will be The Contracting Authority Emerging markets are
input risk of inputs or resources responsibility to ensure an uninterrupted allowed to monitor the supply of may need to stand behind generally more susceptible to
required for the supply of inputs/resources for the project required resources, and may the cost risk for certain market volatility and major
operation of the project and to manage the costs of those inputs. allow for the Private Partner to inputs, or at least cost variations.
is interrupted or the The management of costs is particularly substitute resources if underwrite the Private
cost increases. important where the Private Partner is necessary. Partner’s financing for
paying a periodic variable concession fee Some of the cost risk can be these costs.
to the Contracting Authority based on managed on demand-risk
gross, rather than net, revenue. projects, such as airports, by
Therefore any increase in costs will not passing the risk through to the
decrease the amount payable to the user by way of increases in
Contracting Party (possibly with some airport duties or other charges to
limited exceptions such as increases in airlines or users. However, the
tax or the pass through costs of utilities to ability to do this may be limited
airport users such as police, customs, air as airport projects tend to be
traffic control, etc.) but will reduce the demand elastic (i.e. costs to
amount available to pay the other costs of airlines go up so they reduce
operations, service debt and provide a flights to the airport and the
return to the Sponsors. revenue goes down).

There may be specific instances where Lenders may look to sponsors


the Private Partner may need the share for completion support.
this risk with the Contracting Authority,
such as availability of energy supply, or
reliance on local source materials where
these may be affected by labour disputes,
embargos or other political risks.

Demand risk The availability by both Developed X The default position for airport projects in As it will be absorbing this The Contracting Authority In developed markets, the
volume and quality developed markets is for the Private demand risk, the Private Partner may agree to defer all or Private Partner should have
along with Partner to retain demand and traffic risk should do a full assessment of part of the concession fee access to various data
transportation of (risk of flight and passenger numbers and demand risk and should ensure if there is a shock event. sources to develop realistic
resource or inputs to a total revenue receipts). that the concession agreement and attainable traffic and
project or the demand Where the demand risk is allocated to the appropriately addresses and revenue forecasts (in the
for the product of Private Partner, or the extent that aircraft allocates the risk for everything absence of shock events),
service of a project by movements and/or passengers and so that will impact on demand. such that the Private Partner
consumers/users revenue may be insufficient to cover the The parties should also develop is well placed to manage
cost of constructing, financing and a comprehensive market demand and traffic risk
operating the project in question, as well strategy to deal with the (although traffic forecasts are
as meeting the likely project implementation of the project. almost always too high).
contingencies, then some form of
Contracting Authority support will be
required, and the Contracting Authority
may need to retain an element of demand
risk.

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
Although the general position is that the
Private Partner takes demand risk there is
usually an exception to this for so-called
“shock events”. These are events or
circumstances that may not occur within
the country in which the airport is situated
but which cause a significant fall in traffic
within a certain period but which would not
qualify as force majeure. For example,
9/11 would be a shock event as it had a
significant effect for several years on air
travel worldwide but the global financial
crisis may not have been treated as a
shock event. The effect of a shock event
is to reduce significantly the revenues of
the airport to such an extent that it is
either not capable of paying its operating
costs, servicing debt and meeting its
banking ratios and paying the concession
fee or it is forecast that it will not be able
to do so. In this situation all or an amount
of the variable concession fee may be
deferred until things have stabilised and
the full concession fee can once again be
paid in full together with payment of
deferred amounts.

Demand risk The availability by both Emerging X The default position for airport projects in Both the Contracting Authority There may need to be an Most demand risk airport
volume and quality emerging markets is for the Private and Private Partner should do a element of subsidy from projects in the world have
along with Partner to retain demand and traffic risk full assessment of demand risk the Contracting Authority over- estimated passenger
transportation of (risk of passenger numbers and total and should ensure that the if demand falls below a and traffic numbers and
resource or inputs to a revenue receipts). concession agreement certain amount. If this is restructurings have been
project or the demand To the extent that aircraft movements appropriately addresses and structured as a “cap and common. This creates a
for the product of and/or passengers and so revenue may allocates the risk for everything collar” arrangement then difficulty for Contracting
service of a project by be insufficient to cover the cost of that will impact on demand. the Contracting Authority Authorities in emerging
consumers / users financing and operating the project in The parties should also develop should also start to markets, particularly in the
question, as well as meeting the likely a comprehensive market benefit from economic case of market first projects,
project contingencies, then some form of strategy to deal with the upsides above the Private where there is likely to be a
Contracting Authority support within the implementation of the project. Partner’s base case. lack of relevant comparative
payment structure will be required, and If there is high uncertainty market data to begin with.
the Contracting Authority may need to over passenger
retain an element of demand risk. projections and
Although the general position is that the uncertainty over revenues
Private Partner takes demand there is (due to tariff limitations
usually an exception to this for so-called and/or currency volatility)
“shock events”. These are events or then the project may need
circumstances that may not occur within to be structured on the
the country in which the airport is situated basis of an availability fee
but which cause a significant fall in traffic and this may be more

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
within a certain period but which would not appropriate in markets
qualify as force majeure. For example, where access to aviation
9/11 would be a shock event as it had a transport has been limited
significant effect for several years on air in the past.
travel worldwide but the global financial
crisis may not have been treated as a
shock event. The effect of a shock event
is to reduce significantly the revenues of
the airport to such an extent that it is
either not capable of paying its operating
costs, servicing debt and meeting its
banking ratios and paying the concession
fee or it is forecast it will not be able to do
so. In this situation all or an amount of the
variable concession fee may be deferred
until things have stabilised and the full
concession fee can once again be paid in
full together with payment of deferred
amounts.

Maintenance The risk of maintaining Developed X The Private Partner will have principal The Contracting Authority should Generally speaking, the In developed markets, the
risk the asset to the responsibility for meeting the appropriate take time to ensure that the Contracting Authority’s involvement of the Private
appropriate standards standards regarding maintenance as set output specification properly undue interference with Partner in the operation,
and specifications for out in the output specifications defined by defines the maintenance the Private Partner’s maintenance and
the life of the project. the Contracting Authority. obligations on the Private provision of maintenance rehabilitation of the project
Increased maintenance The Private Partner generally assumes Partner to ensure that the and rehabilitation services provides several benefits by
costs due to increased the overall risk of periodic and system remains robust in the (with the exception of incentivising greater care and
volumes. preventative maintenance, emergency event of early termination or minor management diligence by the Private
maintenance work, work stemming from expiry of the concession services) reduces the Partner in the construction
Incorrect estimates and agreement. There will be benefits of the DBFO phase, and increasing the
cost overruns. design or construction errors,
rehabilitation work, and in certain project requirements that will need to be project model. useful life of the infrastructure.
model instances, work stemming from met by the Private Partner on The required performance
implementing technological or structural hand back and a reserve standard KPIs for an
changes. account or bonding may be airport will often include
required to be provided by the KPIs relating to the
The Contracting Authority may retain the Private Partner as security for its
responsibility of performing certain experience and
obligations. availability at check in, in
services at the airport which it believes are
appropriate or which by law cannot be The primary role of the customs/immigration and
provided by the Private Partner. These Contracting Authority is to security. If these
may include security and police, customs properly define the output functions are not fully
and border control and fire services. The specifications and level of under the control of the
Private Partner may be required to provide services required of the Private Private Partner and failure
suitable accommodation for these people Partner. to meet the relevant KPI
at the airport either for free or at cost. Adequate performance by the may be due to lack of
Private Partner can be further performance by a public
The Private Partner takes the primary risk sector retained service
that the airport and its systems will be enforced by ensuring that the
payment mechanism considers (such as insufficient
maintained to a sufficient level of quality people at immigration
and reliability to ensure that it can attract quality and service failures. The
Contracting Authority will be gates or security) so that
passengers and airlines. However where

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
the system constitutes an essential public allowed to require additional throughput targets are not
service or effective monopoly operation payment from the Private met, then the Private
over that route, it would be sensible for the Partner based on failing to meet Partner may require relief
Contracting Authority to include certain performance standards. from any penalties. In
appropriate KPIs to monitor the service There may also be other some cases if this causes
levels and take effective enforcement remedies such as warning cost or loss of revenue to
action (e.g. through penalties). notices and right to require the Private Partner it may
replacement of replace be a compensation event.
subcontractors.

Maintenance The risk of maintaining Emerging X The Private Partner will have principal The Contracting Authority should Generally speaking, the Some projects in emerging
risk the asset to the responsibility for maintaining the system to take time to ensure that the Contracting Authority’s markets have been procured
appropriate standards the appropriate standards set out in the output specification properly undue interference with on a D&B basis with a view to
and specifications for output specification defined by the defines the maintenance the Private Partner’s then passing over the assets
the life of the project. Contracting Authority. obligations on the Private provision of maintenance to an operations
Increased maintenance The Private Partner generally assumes Partner to ensure that the and rehabilitation services concessionaire. In this case
costs due to increased the overall risk of periodic and system remains robust in the (with the exception of the Contracting Authority will
volumes. preventative maintenance, emergency event of early termination or minor management need to ensure that it has
maintenance work, work stemming from expiry of the agreement. services) reduces the sufficient warranties of the
Incorrect estimates and benefits of the DBFO system components and
cost overruns. design or construction errors, There will be requirements that
rehabilitation work, and in certain project will need to be met by the project model. equipment to allow the
model instances, work stemming from Private Partner on hand back The required performance operator to manage the
implementing technological or structural and a reserve account or standard KPIs for an ongoing maintenance and
changes. bonding may be required to be airport will often include performance risk.

The Contracting Authority may retain the provided by the Private Partner KPIs relating to the
responsibility of performing certain as security for its obligations. experience and
services at the airport which it believes are The primary role of the availability at check in, in
appropriate or which by law cannot be Contracting Authority is to customs/immigration and
provided by the Private Partner. These properly define the output security. If these
may include security and police, customs specifications and level of functions are not fully
and border control and fire services. The services required of the Private under the control of the
Private Partner may be required to provide Partner. Private Partner and failure
suitable accommodation for these people to meet the relevant KPI
Adequate performance by the may be due to lack of
at the airport either for free or at cost. Private Partner can be further performance by a public
The Private Partner takes the primary risk enforced by ensuring that the sector retained service
that the airport and its systems will be payment mechanism considers (such as insufficient
maintained to a sufficient level of quality quality and service failures. The people at immigration
and reliability to ensure that it can attract Contracting Authority will be gates or security) so that
passengers and airlines. However where allowed to require additional throughput targets are not
the system constitutes an essential public payment from the Private met, then the Private
service or effective monopoly operation Partner based on failing to meet Partner may require relief
over that route, it would be sensible for the certain performance standards. from any penalties. In
Contracting Authority to include There may also be other some cases if this causes
appropriate KPIs to monitor the service remedies such as warning cost or loss of revenue to
levels and take effective enforcement notices and right to require the Private Partner it may
action (e.g. through penalties). replacement of replace be a compensation event.
Even though under a Colombian PPP subcontractors.
project perspective this risk is also

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
allocated as a Private Partner risk, a
typical distinction is made between the
airport concessionaire and the airport
operator. Despite that the airport
concessionaire as the awarded contractor
for the project is the primarily responsible
for the maintenance of the
infrastructure/assets, the airport operator,
as a different legal person in many cases,
is joint and severally liable for those same
risks. Additionally, in certain specific
cases, the concessionaire of the airport is
different form the concessionaire of the
runways. In this case, the maintenance
risk is allocated to each concessionaire
regarding the concession specific scope.

Force majeure The risk that Developed X Force majeure is a shared risk and there Project insurance (physical Generally speaking, On developed market
risk unexpected events will be a fairly well developed list of events damage and loss of revenue where parties are unable transactions, the Contracting
occur that are beyond that entitles the Private Partner to relief coverage) is the key mitigant for to agree on a way forward Authority typically
the control of the from performing its obligations. force majeure risks that cause following a force majeure compensates the Private
parties and delay or Typical events include (i) war, armed physical damage. event, after a number of Partner, only for its
prevent performance. conflict, terrorism or acts of foreign The risk of disruption as a result months of continuous outstanding debt (but not for
enemies; (ii) nuclear or radioactive of no-fault events could be force majeure either party its expected rate of return) for
contamination; (iii) chemical or biological mitigated by relaxing the should be entitled to termination arising from a
contamination; (iv) pressure waves performance thresholds (e.g. terminate the concession “natural” force majeure.
caused by devices traveling at supersonic requiring a lower level of contract. If the
speeds; or (v) discovery of any species-at- acceptable service, which then Contracting Authority
risk, fossils, or historic or archaeological allows the Private Partner to does not want the
artefacts. take the risk of a certain number concession contract to be
of day-to-day adverse events terminated then the
Force majeure events occurring during Contracting Authority
construction will also cause a delay in typical to a project of this nature
but without incurring shall pay the Private
completion and therefore revenue Partner the actual
commencement. The ability of the Private performance penalties).
additional cost of
Partner to bear this risk for uninsured risks If the effect of the force majeure continued operating and
will be limited, and the Contracting event is to reduce the revenues an amount of
Authority will typically have to bear the risk of the Private Partner then the compensation in order to
after a certain period of time or level of amount of the variable service the Private
cost has been exceeded. concession fee should be Partner’s debt obligations
During operation, the impact of the force rateably reduced. However, it during the course of the
majeure may require relief from KPI will be a matter of negotiation as event.
penalties or an element of temporary to whether any fixed concession
fee should continue to be Whether the debt can be
reduction or suspension of concession fee fully serviced in such a
payments may be required. payable in full.
scenario prior to the
Increased security costs as a possible time for
result of terrorist events (even in termination, will be a key
different countries) may also area of focus for
need to be addressed given prospective lenders as

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
heightened security concerns. part of their initial credit
assessments.
Where the project is
terminated by either party,
the Contracting Authority
will normally be required
to compensate the Private
Partner fully for debt
owed to the lenders.
The Contracting Authority
may also agree to pay
compensation to the
Private Partner on a “no
fault” basis so that the
Private Partner is paid an
amount equal to the
amount it had invested in
the project less any
returns it had received in
respect of that investment
until termination.
However, this will be a
matter of negotiation on a
project by project basis.

Force majeure The risk that Emerging X Force majeure is a shared risk and you Project insurance (physical Termination payment for Termination payment for
risk unexpected events would expect to see a fairly well damage and loss of revenue prolonged force majeure prolonged force majeure may
occur that are beyond developed list of events that entitle the coverage) is the key mitigant for may differ depending on differ depending on the type of
the control of the Private Partner to relief. force majeure risks that cause the type of force majeure. force majeure. Lenders will
parties and delay or Emerging markets typically distinguish physical damage. Lenders will expect to see expect to see debt covered by
prohibit performance. between Government and non- The risk of disruption as a result debt covered by Contracting Authority and/or
Government force majeure with the of no-fault events could be Contracting Authority insurance payments.
Contracting Authority assuming more risk mitigated by relaxing the and/or insurance
for Government force majeure. performance thresholds (e.g. payments.

In Colombian PPP projects the risk requiring a lower level of


allocation is somewhat different. Force acceptable service, which then
majeure is typically allocated to the allows the Private Partner to
Private Partner (with the caveat of the take the risk of a certain number
shared risk allocation in cases of of day-to-day adverse events
International Armed Conflicts, terrorist typical to a project of this nature
acts, civil war, coups d’état, national or but without incurring
regional strikes) which should seek performance penalties).
insurance coverage for those insurable Increased security costs as a
events. Additionally, it undertakes the risk result of terrorist events (even in
of regulatory or constitutional changes that different countries) may also
might affect its performance or revenue. need to be addressed given
Nevertheless, it is important to note that heightened security concerns.
there is a well-established jurisprudence

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
that protects the Private Partner in cases
of force majeure when such event
produces a breach of the economic
equilibrium of the contract. Is a theory that
derives from the Rebus Sic Stantibus
maxim and which seeks to protect the
incentive and economic stability of the
Private Partner.

Exchange and The risk of currency Developed X There can be currency risk, not just in Exchange and interest rates The Contracting Authority In developed markets, the risk
interest rate risk fluctuations and or the relation to the construction cost of the risks are typically not accounted is not expected to assist of currency fluctuations and
interest rate over the airport itself, but in a mismatch between for beyond the Private Partner’s the Private Partner in interest rates is not substantial
life of a project the currency in which the concession fees own hedging arrangements. mitigating such risks if enough to require the
are payable and the currencies in which However, if the revenues of the there is not a currency Contracting Authority to
the various revenue streams at the airport airport, such as for airline mismatch between provide support if there is not
are received. charges and retail, duty free and revenues and the a currency mismatch between
The Private Partner would look to mitigate food and beverage are received concession fee. revenues and the concession
this risk through hedging arrangements in local currency, the concession fees.
under the Finance Documents, to the fee to the Contracting Authority
extent possible or necessary in that should not be payable in, for
market. example, US Dollars or Euros
(or vice versa).

Exchange and The risk of currency Emerging X There can be currency risk, not just in Some of the cost risk can be As landside revenue will In emerging market airport
interest rate risk fluctuations and or the relation to the construction cost of the managed on demand-risk be collected in local projects, the devaluation of
interest rate over the airport itself, but in a mismatch between projects by passing the risk currency (and possibly local currency beyond a
life of a project the currency in which the concession fees through to the user by way of airport charges too in certain threshold may be a
are payable and the currencies in which adjustments in the amount of some cases) the trigger for non-default
the various revenue streams at the airport charges, but the ability to do this Contracting Authority may termination. Alternatively it
are received. may be limited as airport need to retain the risk of could trigger a “cap and collar”
The Private Partner would look to mitigate projects tend to be demand devaluation of the local arrangement from the
this risk through hedging arrangements elastic (i.e. charges go up and currency to the extent that Contracting Authority with
under the Finance Documents, to the flights (and so passengers) go such devaluation impacts reductions in the concession
extent possible in that market. down). on the economic viability fees payable. Issues of
of the project (due to the convertibility of currency and
In certain countries this may not be need to pay for foreign restrictions on repatriation of
possible due to exchange / interest rate currency imports and funds are also bankability
volatility or currency convertibility service foreign currency issues upon termination in
problems or delays. debt). emerging markets.

Insurance risk The risk that insurance Developed X Where risks become uninsurable there is As part of the feasibility study The Contracting Authority In developed market
for particular risks is or typically no obligation to maintain the Contracting Authority and may need to consider transactions, as neither party
becomes unavailable. insurance for such risks. Private Partner should consider whether it stands behind can better control the risk of
The cost of obtaining If an uninsured risk event occurs, the whether insurance might unavailability of insurance coverage becoming
the required insurance parties may agree to negotiate in good become unavailable for the insurance, in particular unattainable, this is typically a
is more expensive than faith risk allocation going forward, while project given the location and where this has been shared risk.
anticipated. allowing for the termination of the project if other relevant factors. caused by in-country or Where the cost of the required
an agreement cannot be reached. The There will be detailed regional events or insurance increases
There is a significant circumstances or an act
insured event and Contracting Authority may choose to consideration given to this by the significantly, the risk is
assume responsibility for the uninsurable insurance advisers to the Private or threat of terrorism. typically shared by either

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
whether reinstatement risk, while requiring the Private Partner to Partner and to the lenders if having an agreed cost
should occur. regularly approach the insurance market there is project financing. escalation mechanism up to
to obtain any relevant insurance. If the uninsured risk is ceiling or a percentage
If the cost of insurance increases above fundamental to the project (e.g. sharing arrangement - this
specified amounts this increased cost may physical damage cover for major allows the Contracting
be shared by the parties. project components) and the Authority to quantify the
parties are unable to agree on contingency that has been
If there is a major insured loss at the priced for this risk.
airport, if the airport has been project suitable arrangements then the
financed the lenders will usually require Private Partner may need an exit In circumstances where the
that if the likely insurance proceeds are route (e.g. termination of the required insurance becomes
above a specified amount, an economic project on the same terms as if it unavailable, the Contracting
test is carried out to ascertain whether if were an event of force majeure). Authority is typically given the
reinstatement were to occur (a) would the The Private Partner’s sponsors option to either terminate the
insurance proceeds be sufficient to pay for and/or the Contracting Authority project (and pay
the full cost of the reinstatement, (b) would may consider that it would be to compensation on usually the
the Private Partner be able to service its their benefit to ensure that the same basis as termination for
debt in full and pay other operating costs airport is reinstated, rather than force majeure) or to proceed
whilst the reinstatement took place (and the lenders taking the insurance with the project and effectively
this will often depend on the sufficiency of proceeds and applying these in self-insure and pay out in the
the advance loss of revenue or business prepayment of their loan, by event the risk occurs.
interruption insurance) and (c) will the agreeing to pay off the lenders
debt be repaid on its scheduled or provide a top up to ensure
repayment dates. If one or more of these that a loan life cover ratio test
conditions is not satisfied the lenders will could be passed.
require that the insurance proceeds will be
applied in prepayment (even though in this
scenario the amount of insurance
proceeds that will be paid will be less than
the reimbursement cost).

Insurance risk The risk that insurance Emerging X Where risks become uninsurable there is As part of the feasibility study The Contracting Authority In emerging market
for particular risks is or typically no obligation to maintain the Contracting Authority and may need to consider transactions, the Contracting
becomes unavailable. insurance for such risks. Private Partner should consider whether it stands behind Authority typically does not
An additional option that is typically whether insurance might unavailability of take the risk of uninsurability
included under the PPP contracts in become unavailable for it given insurance, in particular arising on the project,
Colombia is, that whenever the Private the location and other factors where this has been although there are good
Partner is unable to insure the obligatory relevant to the project. caused by in-country or grounds to say that it should
policies provided in the contract (eg. regional events or do so if the Private Partner
Stability of works policy, salary payment circumstances. has no protection for the
policy, performance policy), for the reason consequences of a natural
that such policy does not exist in the force majeure that becomes
Colombian market, the contract may be uninsurable and if Contracting
terminated without penalty or default Authority wishes for the
attributed to the Private Partner. Private Partner to continue
with the project.
If an uninsured risk event occurs, the
Private Partner will typically have to bear
this risk.
If the uninsured risk is fundamental to the

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
project (e.g. physical damage cover for
major project components) then the
Private Partner may need an exit route
(e.g. force majeure termination) if it cannot
reinstate the project on an economic
basis.

Political risk The risk of Government Developed X The Contracting Authority will bear The Contracting Authority will This type of issue will The type of political risk
intervention, responsibility for political events outside outline certain political events as typically lead to a events that occur in developed
discrimination, seizure the Private Partner’s control, and the delay events, compensation termination event where markets are likely more
or expropriation of the Contracting Authority will be responsible events, excusing causes that the Contracting Authority subdued and less drastic than
project. should it fail to maintain in existence the involve a breach of obligations or will need to compensate emerging markets. As such,
Cancellation of bilateral licenses (unless the termination or non- interference by the Contracting debt and equity in full. political risk insurance is not
treaties or failure to renewal is due to default by the Private Authority with the project. typically obtained.
maintain membership Partner) and access to the airport and Strikes by public sector workers
of international bodies. transport links necessary to allow the are often treated as a relief or
Private Partner to fulfil its obligations. similar event that means the
Industrial action by
public sector airport Industrial action by workers at the airport Private Partner will not be in
workers. who are to transfer to the Private Partner breach of performance
can be an issue if their conditions are not obligations.
as good or they perceive that they may be
disadvantaged in the future. Also customs
workers and air traffic controllers often
remain public sector employees and can
be prone to taking industrial action that
can cause the Private Partner to fail to
meet performance targets at the airport or
suffer loss of revenue.

Political risk The risk of Government Emerging X The Contracting Authority typically bears The Contracting Authority will This type of issue will Investors and commercial
intervention, responsibility for political events outside need to ensure that other typically lead to a lenders may also be able to
discrimination, seizure the Private Partner’s control and the Government departments keep termination event where cover themselves by use of
or expropriation of the Contracting Authority will be responsible in line with the project objectives the Contracting Authority political risk insurance, leaving
project. should it fail to maintain in existence the and will need to actively manage will need to compensate this risk to be managed by the
Public sector licenses (unless the termination or non- the various stakeholders in the debt and equity in full insurer against the
budgeting. renewal is due to default by the Private project to achieve this. potentially with a Contracting Authority.
Partner) and access to the airport and Government guarantee.
transport links necessary to allow the
Private Partner to fulfil its obligations.
This concept may include any “material
adverse Government action” (broadly
speaking any act or omission of any
Government entity which has a material
adverse impact on the Private Partner’s
ability to perform its obligations and/or
exercise its rights under the concession
agreement) and may also include a
specific list of events of a political nature
such as expropriation, interference,

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
general strikes, discriminatory changes in
law (see section on regulatory/change in
law risk), as well as more general
uninsurable events such as risks of wars /
riots / embargos etc.
The Private Partner would expect
compensatory relief. The Government
may not always be able (or is unwilling) to
pay such compensation, Therefore the
Private Partner may also need an ability to
exit the project if the political risks
continue for an unacceptable duration.
In Colombian PPP projects the political
risk, understood as, the risks derived from
regulatory and Constitutional changes
including any legislative, political or
macroeconomic effect over the
Concession, is allocated as a Private
Partner risk. Even though the Private
Partner has not control over these
situations, whatsoever, the contractual
design disables it to transfer or share the
risk with the Public Partner. Additionally,
as these are typical “non-insurable” risks,
they imply the obligation from the Private
Partner to directly assume the risks. It
may be noted that the “breach of the
economic equilibrium of the contract” may
also be in place for these type of
situations.

Regulatory/chan The risk of law Developed X The risk of change in law sits mostly with Change in law risk that is Past concession models
ge in law risk changing and affecting the Contracting Authority but there will be retained by the Private Partner (including that developed
the ability of the project a degree of risk sharing in the following may be mitigated by allowing in the UK) used to require
to perform and the price manner: increases in costs by virtue of the Private Partner to
at which compliance The Private Partner will be kept whole in indexation provisions (on the assume, and price for, a
with law can be respect of changes in law which are: (i) basis that general changes in specified level of General
maintained. Discriminatory (to the project or the law will affect the market equally Change in law capex risk
Change in taxation. Private Partner) (ii) Specific (to the airport and should be reflected in during the operational
sector) or (iii) General Change in law. general inflation). period, before
Change in law risk may also be compensation would be
A change in law is often subject to a paid. The UK Government
threshold before the Private Partner is mitigated where there is an
ability to pass costs relating to ultimately decided that
entitled to compensation particularly in the this allocation did not
case of general change in law where the changes in law to airport users
(but see comments about limits represent value for money
threshold may be different depending on and reversed this
whether it relates to capital expenditure, on this).
position. Some countries
increased operating costs or loss of Some projects only permit the which adopted the UK
revenue. It may also vary (or not exist) Private Partner to claim relief for SOPC model had already

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Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
depending on if it is during the general changes in law occurring taken this approach.
construction period and foreseeable or after completion of construction. Accordingly the
whether the cost of compliance can be This approach may be justified if Contracting Authority
passed on to passengers or airlines. the country's legal regime should be mindful of how
There may be restrictions on what ensures that the prevailing legal it will fund these changes
increases the Private Partner can pass on regime at the start of should they arise -
and also economic restraints and raising construction is fixed until the changes in charges may
costs may reduce usage and so revenues. works are complete (i.e. does be possible but given the
Changes in law will always entitle the not operate retrospectively to demand elasticity in the
Private Partner to a Variation where this is projects in progress) or the airport sector this may
necessary to avoid an impossible construction period is such that have a detrimental effect
obligation or allow extra time to achieve any further relevant changes in on the number of flights
compliance with the changed law. If this law have been announced or are and/or passengers.
cannot be achieved the Private Partner foreseeable and can be taken
will typically be entitled to terminate as if a account of in the construction
Contracting Authority breach had budget and timetable.
occurred.
Where the payment structure of an airport
project is a concession fee payable to the
Contracting Authority based on gross,
rather than net, revenues an increase in
taxation will increase the costs of the
Private Partner without providing any relief
in relation to the amount of the concession
fee payable. This will reduce the amount
available to the Private Partner to pay
operating costs and debt service. If there
are restrictions on increases in airport
charges then the Private Partner may not
be able to pass the cost of the increase in
the taxation on to the airport users, as
would be the case with other businesses
that were not operating in a similar price
regulated environment.
Even if there are no price controls, the
Private Partner cannot just increase
charges to airlines without meeting
resistance, either because they have
printed their brochures and themselves
cannot pass on the extra charges to their
customers or because they will reduce
their usage of the airport. For these
reasons, Private Partners have often
sought and received protection from tax
increases above thresholds by reduction
in concession fee rates. This has
generally not been the case with
increases in taxes and duties on duty free

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Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
goods or food and beverage sales.

Regulatory/chan The risk of law Emerging X The Contracting Authority typically bears The Contracting Authority will Some projects may also In emerging markets, the
ge in law risk changing and affecting principal responsibility for changes in law need to ensure that various provide for a stabilisation Private Partner is likely to
the ability of the project post-bid / post-contract signature. Government departments keep clause that entrenches have a greater level of
to perform and the price There may be a degree of risk sharing the project in mind when passing certain legal positions protection from changes in law
at which compliance with the Private Partner and there may be new laws to ensure that the (such as the current tax to reflect the greater risk of
with law can be certain risks that the Private Partner is Private Partner is not regime) against any future change (including both
maintained. expected to bear alongside the remainder inadvertently affected. changes in law. This may likelihood and consequences)
Change in taxation. of the market. The various Government require a level of and in order to attract
departments that may impact on parliamentary ratification investors to the project. In that
The Private Partner would look to be kept of the concession way, the Contracting Authority
whole in respect of changes of law which the project should therefore be
cognisant of the risk allocation in agreement. would be expected to assume
are discriminatory (towards the project or more change in law risk than
the Private Partner), or specific (to the the project when passing laws However, the stabilisation
and regulations that may have method is generally not compared to a project in a
airport sector). developed market.
an impact on it. favoured by Governments
The Private Partner may also receive or NGOs (e.g. because of
protection against other (general) changes the concept of Private
in law, however the level of protection will Partner immunity from
reflect the Private Partner’s ability to updates to environmental
mitigate this risk (through the cost laws, for example).
increase or inflation regime, if applicable)
and whether the risk is of general
application to the market (e.g. an
increased tax on corporate tax or
dividends across the board). It may also
be appropriate for the Private Partner to
bear a certain financial level of risk before
compensation becomes payable, to
ensure that claims are only made for
material changes in circumstances.
Changes in law should always entitle the
Private Partner to a variation where this is
necessary to avoid an impossible
obligation or allow extra time to achieve
compliance with the changed law, or
otherwise should give rise to a right to
terminate (typically on a Contracting
Authority default basis).
In the Colombian context, the political risk
is relevant to regulatory/change in law
(see section on political risk).
Nevertheless, when the regulatory change
implies a lessening of the Private Partner
revenue due to unfavourable effects
derived from tariffs structure changes, the
Public Partner is obliged to cover the loss
of the Private Partner.

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Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Inflation risk The risk that the costs Developed X Inflation risks are typically primarily borne The Contracting Authority may
of the project increase by the Private Partner. provide flexibility to increase
more than expected. Demand risk projects such as airports charges to airport users
need the ability to increase the charges to (possibly up to limits) or allow
airport users or to increase prices, but this additional increase in high
ability may often be restricted as raising inflation scenarios.
airport charges is likely to be a sensitive
political issue and may well have an
impact on usage and so revenue.
Therefore, the Private Partner may need
additional Contracting Authority support
because if the Private Partner’s costs are
increasing because of inflation the
percentage of revenue increase may not
keep pace so the difference between the
costs and the amount the Private Partner
has to pay in concession fees … putting
pressure on the Private Partner’s
finances..

Inflation risk The risk that the costs Emerging X Inflation risk is typically primarily borne by The Contracting Authority may The Contracting Authority The fluctuation of inflationary
of the project increase the Private Partner. provide flexibility to increase may need to provide a costs is a greater risk in
more than expected. Demand risk projects such as airports charges to airport users subsidy to the Private emerging markets than it is in
need the ability to increase the airport (possibly up to limits) or allow Partner if the user cannot developed markets and the
charges and prices for food and additional increase in high bear the cost increase. Private Partner’s expectation
beverages, etc., but this ability may often inflation scenarios. will be that this risk is borne
be restricted (as raising charges and An additional comment on this and managed by the
prices is likely to be a sensitive political regard is that one of the main Contracting Authority during
issue), and so the Private Partner may concerns for financial institutions the concession term beyond
need additional Contracting Authority in Colombian PPP projects has the point at which the
support. been the risk of inflation increases in costs can be
associated to additional costs of passed on to the airport users
the works. This risk has been either because of price
addressed through closed priced increase restrictions or
EPC contracts with the because it will reduce usage
inflationary risk allocated to the and so revenue.
Private Partner or the EPC
contractor, depending on each
case. Hedges are also typical for
addressing this risk, and usually
additional securities from the
Private Partner are demanded
by the financial institutions. The
inflationary risk as a
macroeconomic effect is usually
not covered by the Public
Partner in airport concessions.

Strategic risk Change in shareholding Developed X Contracting Authority wants to ensure that Contracting Authority will limit In developed markets the

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
of Private Partner. the Private Partner to whom the project is Private Partner’s ability to Private Partners’ desire for
Conflicts of interest awarded remains involved. change shareholding for a period certainty of involvement of key
between shareholders Bid awarded on basis of Private Partner’s (i.e. lock-in for construction participants will need to be
of Private Partner. technical expertise and financial resources period) and thereafter may balanced with the private
therefore sponsors should remain impose a regime restricting sector’s requirements for
involved. change in control without flexibility in future business
consent or where pre-agreed plans, particularly in the equity
criteria cannot be met. investor markets and the
Pre-tender proposal should set added benefits of allowing
out proposals for governance of capital to be ‘recycled’ for
Private Partner. future projects.

Strategic risk Change in shareholding Emerging X Contracting Authority wants to ensure that Contracting Authority will limit In emerging markets, there is
of Private Partner. the Private Partner to whom the project is Private Partner’s ability to typically more restriction on
Conflicts of interest awarded remains involved. change shareholding for a period Private Partner’s ability to
between shareholders Bid awarded on basis of Private Partner’s (i.e. lock-in for construction restructure or change
of Private Partner. technical expertise and financial resources period plus ramp up phase of ownership, although very
therefore sponsors should remain operation). restrictive provisions may
involved. Pre-tender proposal should set deter investment.
out proposals for governance of
Private Partner.

Disruptive The risk that a new Developed X Digital technologies will allow for quicker, Airports could (as some are
technology risk emerging technology more efficient check in, baggage drops doing already) require
unexpectedly displaces and security screening. This will reduce passengers to turn up several
an established the time it is necessary to spend at the hours before their flight and
technology used in airport as much could be done at home or earlier than the time needed to
airport sector. the office. The effect is to reduce the undertake the more automated
“dwell time” at airports which is likely to check in, baggage and security
lead to less time in the shopping area so checks (and longer than the
less spending and therefore less revenue airlines themselves recommend)
for the airport derived from duty free and in an attempt to ensure
food and beverage sales. passengers have to spend “dwell
Driverless cars when they are introduced time” in the retail and food and
will mean that it will be possible to travel to beverage areas and so spend
the airport in your driverless car and, money. Reducing the number of
rather than paying very high airport seats for waiting passengers
parking charges for the length of your trip, also increases the likelihood that
you could send the car home. Car parking they will need to buy food and
revenue, which is a good source of drink to actually have
revenue for airports, either directly or somewhere to sit or wander
through fees charging to parking around the shops and be
concessionaires, would be greatly tempted to spend.
reduced. When driverless cars are
The increased usability and availability of prevalent airports could
digital communications such as virtual introduce drop-off fees to
meetings and personal video conferencing compensate for reduced parking
may lead to less business travel and so revenue.
lower aircraft movements and passengers The Private Partner would need

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
at non-tourist airports. Coupled with the flexibility to introduce this.
businesses’ desire to reduce their carbon
footprint and wishing to save money this
could lead to lower revenues.
The need to mitigate the harmful effects of
climate change may well lead to greater
costs being imposed on airlines (which will
pass them on to passengers) or on
passengers directly will make flying more
expensive and so reduce demand in some
countries.

Disruptive The risk that a new Emerging X Digital technologies will allow for quicker, Airports could (as some are
technology risk emerging technology more efficient check in, baggage drops doing already) require
unexpectedly displaces and security screening. This will reduce passengers to turn up several
an established the time it is necessary to spend at the hours before their flight and
technology used in airport as much could be done at home or earlier than the time needed to
airport sector. the office. The effect is to reduce the undertake the more automated
“dwell time” at airports which is likely to check in, baggage and security
lead to less time in the shopping area so checks (and longer than the
less spending and therefore less revenue airlines themselves recommend)
for the airport derived from duty free and in an attempt to ensure
food and beverage sales. passengers have to spend “dwell
Driverless cars when they are introduced time” in the retail and food and
will mean that it will be possible to travel to beverage areas and so spend
the airport in your driverless car and, money. Reducing the number of
rather than paying very high airport seats for waiting passengers
parking charges for the length of your trip, also increases the likelihood that
you could send the car home. Car parking they will need to buy food and
revenue, which is a good source of drink to actually have
revenue for airports, either directly or somewhere to sit or wander
through fees charging to parking around the shops and be
concessionaires, would be greatly tempted to spend.
reduced. When driverless cars are
The increased usability and availability of prevalent airports could
digital communications such as virtual introduce drop-off fees to
meetings and personal video conferencing compensate for reduced parking
may lead to less business travel and so revenue.
lower aircraft movements and passengers The Private Partner would need
at non-tourist airports. Coupled with the flexibility to introduce this.
businesses’ desire to reduce their carbon
footprint and wishing to save money this
could lead to lower revenues.
The need to mitigate the harmful effects of
climate change may well lead to greater
costs being imposed on airlines (which will
pass them on to passengers) or on
passengers directly will make flying more

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
expensive and so reduce demand in some
countries.

Early The risk of a project Developed X The level of compensation payable on A key mitigant is to make sure The lenders will require Early termination
termination being terminated before early termination will depend on the the termination triggers are not direct agreements/ with compensation is well defined
(including any the expiry of time and reasons for termination and typically for: hair triggers and that there are the Contracting Authority and political risk insurance is
compensation) the monetary (1) Contracting Authority default – the adequate well-defined routes for giving the lenders step-in not typically obtained due to a
risk consequences of such Private Partner would get senior debt, each party to remedy any rights in the case of the lesser risk of the Contracting
termination. junior debt, equity and a level of equity alleged default. Contracting Authority Authority defaulting on its
return; calling a default payment obligations.
termination or in the event
(2) Non-default termination – the Private of the Private Partner
Partner would get senior debt and equity being in default under the
repaid (less receipts); and loan documentation. The
(3) Private Partner default – (a) Where the lenders would typically be
project cannot be retendered (due to given a grace period to
political sensitivity or a lack of interested gather information,
parties) the Private Partner would typically manage the project
be entitled to an amount equal to the company and seek a
adjusted estimated fair value of future resolution or ultimately
payments, less the costs of providing the novate the project
services under the project/concession documents to a suitable
agreement. (b) Where the project can be substitute concessionaire.
retendered, the Private Partner would be
entitled to the amount that a new private
partner would pay for the remaining term
of the concession, less any costs incurred
by the Contracting Authority during the
retendering process.
It is common under Colombian PPP
projects structure, that due to Private
Partner default the contract liquidation
balance sheet turn out negative. This is
due to the fact that fines and penalty
clauses are applied when the Private
Partner is in default and are usually
discounted when an administrative lapsing
occurs. In addition to this, it is not
common that the Contracting Authority
recognizes early termination payments to
the Private Partner regarding future
income loss, when the early termination is
caused by a Private Partner default.
Additionally, a key aspect under
Colombian PPP project scheme is that
early termination payments are not
calculated based on the outstanding debt
payment. Nevertheless, early termination
payments are the general rule, and as

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
such it includes the payment of all the
works entered into by the Private Partner
not yet paid by the Contracting Authority.
It is common for the senior debt and
hedging termination costs to be paid by
the Contracting Authority, and for rights of
set-off below that figure to be restricted in
every scenario other than Private Partner
default. In this scenario compensation
from the Contracting Authority will typically
be in a range between 100% and 95% of
the senior debt and hedging termination
costs. While it may seem that project
lenders are therefore not significantly
exposed to a project default, they would
not always have the right to call for a
termination in these circumstances, and
so they are still motivated to make the
project work to recover their loan if the
Contracting Authority chooses not to
exercise its termination rights.

Early The risk of a project Emerging X The level of compensation payable on A key mitigant is to make sure The risk of the In emerging markets, there
termination being terminated before early termination will depend on the the termination triggers are not Contracting Authority not may also be sovereign
(including any the expiry of time and reasons for termination and typically for: hair triggers and that there are paying the compensation guarantees which support the
compensation) the monetary (1) Contracting Authority default – the adequate well-defined routes for on termination may Contracting Authorities
risk consequences of such Private Partner would get senior each party to remedy any require a guarantee from payment obligations or central
termination. debt, equity and a level of equity alleged default. a higher level of bank undertakings to make
return; Government to guarantee foreign currency available.
the level of compensation Political risk insurance may be
(2) Non-default termination – the Private payable on termination.
Partner would get senior debt and available and is likely to be
equity repaid (less receipts); and The lenders will require sought to cover the risk of the
direct agreements with Contracting Authority or
(3) Private Partner default – the Private the Contracting Authority Government guarantor
Partner would typically get a giving the lenders step-in defaulting on its payment
payment that is a function of the rights in the case of the obligation.
input cost of the project (construction Contracting Authority
value / book value) or the calling a default
outstanding senior debt. termination or in the event
In many emerging markets it is common of the Private Partner
for the senior debt and hedging being in default under the
termination costs to be paid by the loan documentation. The
Contracting Authority, and for rights of set- lenders would typically be
off below that figure to be restricted in given a grace period to
every scenario other than Private Partner gather information,
default. In this scenario compensation manage the project
from the Contracting Authority will typically company and seek a
be in a range between 100% and 95% of resolution or ultimately
the senior debt and hedging termination novate the project

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Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
costs. While it may seem that project documents to a suitable
lenders are therefore not significantly substitute concessionaire.
exposed to a project default, they would
not always have the right to call for a
termination in these circumstances, and
so they are still motivated to make the
project work to recover their loan if the
Contracting Authority chooses not to
exercise its termination rights.

SIN-#7991991-v10
Risk Matrix 3: Light rail (DBFOM) 64

Risk Matrix 3: Light rail (DBFOM)


 New rail developed as a design, build, finance, operate and maintain (DBFOM)
 Assumes that the procuring entity identifies the site on which the project will be built
 Assumes that the rolling stock will be used on a light rail network
 Project scope may include associated infrastructure, such as tunnelling, interconnection with other transit nodes, and station and stop construction
 Emerging market is based on a concession to DBFOM in Nigeria
 Civil law comparison is based on a DBFOM in the Netherlands
 Key risks
 Land purchase and site risk
 Construction risk
 Demand risk

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Land purchase The risk of acquiring Developed X The Contracting Authority bears the The Contracting Authority should The Contracting Authority Land rights and ground
and site risk title to the land to be principal risk as it is best placed to select undertake detailed ground, may need to use its conditions in developed
used for a project, the and acquire the required land interests for environmental and social legislative powers to markets are typically more
selection of that site the project. assessments and should secure the site (e.g. established and risks can be
and the geophysical That said, there may be some areas disclose such information to the through expropriation / mitigated with appropriate due
conditions of that site. where risk will be shared with the Private Private Partner as part of the compulsory acquisition). diligence with relevant land
Planning permission. Partner. Whilst the Contracting Authority bidding process. Even where you have a registries and utility records.

Access rights. may be able to secure the availability of The Contracting Authority legally clear site, The Private Partner’s
the corridor, the suitability of the corridor should, to the greatest extent Government enforcement obligations with regards to
Security. may be dependent on the Private possible, ensure that it has a powers may be needed to indigenous rights are
Heritage. Partner’s design solution (such as complete understanding of the properly secure the site generally well legislated in
catenary location for overhead power), as risks involved in securing the for the private sector. developed markets, for
Archaeological.
well as depot location etc. site and the site constraints that There may be historic example requirement to enter
Pollution. will impact on the construction encroachment issues that into indigenous land use
The Contracting Authority would generally
Latent defects. be responsible for providing a “clean” site, and operation of the system. the Private Partner agreements under native title
with no restrictive land title issues, and The Contracting Authority should cannot be expected to legislation in Australia and the
existing utilities and contamination either also manage any indigenous deal with. equivalent under first nations
dealt with or fully surveyed and warranted. land rights issues that may Examples include the law in Canada.
Existing assets proposed to be used in the impact on the use of the site. need to manage the
project should also be fully surveyed and Prior to awarding the tender the relocation of people (e.g.
warranted. The Private Partner may take Contracting Authority could the removal of informal
some risk for dealing with adverse (through legislation and a proper housing or businesses)
conditions revealed by surveys but other consultation process) limit the and continued efforts to
unforeseeable ground risks (e.g. ability for potential land right manage the social and
archaeological risks) are likely to need to owners or neighbouring political impact of the
be held by the Contracting Authority. properties and trades to raise project on and around the
Where it is not possible to fully survey claims on the land and/or for site.
prior to award (eg identification of injurious affection. The Contracting Authority
underground existing utilities in high may be required to
density urban areas) risk will be allocated provide additional site
to Contracting Authority or shared. security / assistance
The Contracting Authority should also during operations to
consider the impact that the project will manage this risk.
have on neighbouring properties and
trades and may need to retain this risk of
unavoidable interference.
In a Dutch project, the Contracting
Authority is the legal owner of the project’s
location (and where this is not the case,
shall acquire the legal title to the location)
and provides access to the Private
Partner on the basis of the DBFOM
contract. If no (timely) access is provided,
the financial loss incurred by the Private
Partner will be reimbursed by the
Contracting Authority. The financial loss is
calculated on the basis of an “open book”

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
principle. Site risk (pollution, archaeology,
defects in existing infrastructure) is for the
Contracting Authority, unless it was
evident from the available project data or
could have been evident to a professional
contractor.

Land purchase The risk of acquiring Emerging X The Contracting Authority bears the The Contracting Authority should The Contracting Authority Land rights and ground
and site risk title to the land to be principal risk as it is best placed to select undertake detailed ground, may need to use its conditions (in particular
used for a project, the and acquire the required land interests for environmental and social legislative powers to reliable utilities records, and
selection of that site the project. assessments and should secure the site (e.g. land charges) in emerging
and the geophysical That said, there may be some areas disclose such information to the through expropriation / markets may be less certain
conditions of that site. where risk will be shared with the Private Private Partner as part of the compulsory acquisition). than in developed markets,
Planning permission. Partner. Whilst the Contracting Authority bidding process. Even where you have a where established land
may be able to secure the availability of The Contracting Authority legally clear site, registries and utility records
Access rights. exist.
the corridor, the suitability of the corridor should, to the greatest extent Government enforcement
Security. may be dependent on the Private possible, ensure that it has a powers may be needed to In the absence of legislation in
Heritage. Partner’s design solution (such as complete understanding of the properly secure the site emerging markets, indigenous
catenary location for overhead power), as risks involved in securing the for the private sector. land rights issues and
Archaeological.
well as depot location etc. site and the site constraints that There may be historic community engagement can
Pollution. will impact on the construction encroachment issues that be managed by the
The Contracting Authority would generally
Latent defects. be responsible for providing a “clean” site, and operation of the system. the Private Partner Contracting Authority through
with no restrictive land title issues, and The Contracting Authority should cannot be expected to the adoption of IFC
Utility Installations. deal with. Safeguards for the project,
existing utilities and contamination either also manage any indigenous
dealt with or fully surveyed and warranted. land rights issues that may Examples include the particularly in order to ensure
Existing assets proposed to be used in the impact on the use of the site. need to manage the international financing options
project should also be fully surveyed and relocation of people (e.g. are available to the project.
Prior to awarding the tender the See comments on
warranted. The Private Partner may take Contracting Authority could the removal of informal
some risk for dealing with adverse housing or businesses) “Environmental and Social
(through legislation and a proper Risk” for a light rail project in
conditions revealed by surveys but other consultation process) limit the and continued efforts to
unforeseeable ground risks (e.g. manage the social and emerging markets.
ability for potential land right
archaeological risks) are likely to need to owners or neighbouring political impact of the
be held by the Contracting Authority. properties and trades to raise project on and around the
The Contracting Authority should also claims on the land and/or for site.
consider the impact that the project will injurious affection. The Contracting Authority
have on neighbouring properties and Following the completion of the may be required to
trades and may need to retain this risk of existing asset and utility survey, provide additional site
unavoidable interference. the Contracting Authority shall security / assistance
The removal and resettlement obligations procure that the relevant owner, during operations to
on the Contracting Authority are operator or manager of any manage this risk.
continuing obligations and are typically utility installation enters into an
undertaken in phases or sections at the agreement with the Private
request of the Private Partner from time to Partner to identify how to deal
time in coordination with the construction with the relevant utility
programme. installation.

Environmental The risk of the existing Developed X The Private Partner will have primary The Contracting Authority should The Contracting Authority Environmental scrutiny is
and social risk latent environmental responsibility to accept the project site in conduct the necessary due will need to take increasing even in developed
conditions affecting the an “as is” condition, subject to Contracting diligence in order to ascertain meaningful steps both markets, as both Private

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
project and the Authority’s disclosure of relevant matters, the environmental fitness of the before and during the Partners and Contracting
subsequent risk of and manage the environmental and social site and disclose all known project to manage social Authorities have come under
damage to the strategy across the project, as well as environmental issues to the impacts of construction increasing burdens to develop
environment or local obtaining all required licenses, permits Private Partner. and operation. sound environmental and
communities. and authorizations as necessary. The Contracting Authority will be Investors and lenders social risk management plans
Existing environmental risks of the site required to review all may expect to see a plan before construction begins.
prior to the Private Partner’s acceptance environmental plans put forth by to see how these aspects
of the site that have not been disclosed or the Private Partner, to ensure are dealt with.
within the knowledge of the Private that such plans will be adequate
Partner prior to commercial close will be to appropriately manage the
deemed to be the responsibility of the risks of the project.
Contracting Authority. See comments on In the Dutch PPP market it will
“Land purchase and site risk” for a light typically be the Private Partner’s
rail project in developed markets. responsibility (together with its
Social risks, insofar as they may involve advisors) to determine whether
indigenous groups, will be the any environmental plans are
responsibility of the Contracting Authority. adequate for the project.
This type of risk does not occur in the
Dutch PPP market.

Environmental The risk of the existing Emerging X The Private Partner will have primary The Contracting Authority International lenders and
and social risk latent environmental responsibility to manage the will need to take development finance
conditions affecting the environmental and social strategy across meaningful steps both institutions are particularly
project and the the project, however existing before and during the sensitive about environmental
subsequent risk of environmental conditions which cannot be project to manage social and social risks, as a result of
damage to the adequately catered for or priced may need impacts of construction their commitment to the
environment or local to be retained by the Contracting and operation. Equator Principles. They will
communities. Authority. Investors and lenders look very closely at how these
The Contracting Authority may also need may expect to see a plan risks are managed at both
to retain responsibility for social impacts on how these aspects will private and public sector level
which are unavoidable from the be dealt with. and this scrutiny is helpful to
development of the project (e.g. mitigate the risks posed by
compensation for expropriation of these issues.
indigenous land rights and/or relocation of
urban communities / businesses).

Design risk The risk that the project Developed X The Private Partner will have principal The Contracting Authority will Developed market rail projects
has not been designed responsibility for adequacy of the design often broadly draft the Private benefit from stable resource
adequately for the of the system and its compliance with the Partner’s design and availability and defined design
purpose required. output / performance specification. construction obligations to standards which allow for
Feasibility study. The Contracting Authority may retain satisfy the output specifications increased innovation and
some design risk in certain aspects of the and ensure compliance with productivity gains. The quality
Approval of designs. applicable legal requirements of the information provided by
system or related works, depending on
Changes to design. how prescriptive the Contracting Authority and good industry practice the Contracting Authority and
is in the output specification. standards. This allows for limited ability to verify such
private sector innovation and data can also hinder the
If the output specification is too efficiency gains in the design. Private Partner’s ability to
prescriptive (e.g. the required route unconditionally take full
corridor or track gauge constrains the A design review process will
allow for increased dialogue and design risk.

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
efficiency of the design or the choice of cooperation between the
rolling stock) the Private Partner’s ability Contracting Authority and the
to warrant the fitness for purpose of its Private Partner, however the
design solution may be impacted, and the mutual review process should
Contracting Authority will to that extent not be construed as a reduction
share in the design risk. or limitation of the Private
If the project is being integrated into Partner’s overall liability.
existing infrastructure, the Private In a Dutch project, the output
Partner’s ability to warrant the fitness for specifications are broadly
purpose of its design solution may be defined so to allow the Private
impacted (in that it will not be able to Partner’s optimizations and
warrant defects in the existing innovative solutions. During the
infrastructure that may impact dialogue sessions in the tender
performance). phase, the output specifications
can be changed or further
detailed (ensuring level playing
field between the candidates to
abide by the public procurement
principles).

Design risk The risk that the project Emerging X The Private Partner will have principal The Contracting Authority will Emerging market rail projects
has not been designed responsibility for adequacy of the design need to decide how prescriptive may be particularly dependent
adequately for the of the system and its compliance with the it wants to be in the output on availability of reliable
purpose required. output / performance specification. specification. traction power or fuel
Feasibility study. The Contracting Authority may retain It may wish to request be a availability, which have
some design risk in certain aspects of the degree of cooperation and implications for the Private
Approval of designs. Partner’s ability to meet the
system or related works, depending on feedback during the bidding
Changes to design. how prescriptive the Contracting Authority phase to ensure that the bidding reliability requirements in the
is in the output specification. consortia’s expectations in terms output specification.

If the output specification is too of an appropriate risk allocation


prescriptive (e.g. the required route for design responsibility are take
corridor or track gauge constrains the into account when finalising the
efficiency of the design or the choice of output specification.
rolling stock) the Private Partner’s ability
to warrant the fitness for purpose of its
design solution may be impacted, and the
Contracting Authority will to that extent
share in the design risk.
The prescriptiveness of the output
specification is usually dependent on the
depth of the feasibility study.
Any delay in approving designs is a
Contracting Authority risk.
For changes to design – the risk allocation
depends on the reason for the change. If
the original design is deficient the Private
Partner will retain the risk or if the change
to the design is required by the

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
Contracting Authority it may become a
Contracting Authority risk.

Construction Labour dispute. Developed X The Private Partner assumes project It may be difficult for the Private The Contracting Authority In developed markets risk is
risk Interface/ project management risk unless certain work is Partner to mitigate these may have a critical role to considered manageable
management. dependent on Contracting Authority integration risks solely through play at stages of the through robust pass through
Commissioning work/related infrastructure work being contractual risk allocation, as the construction, testing and of obligations to credible and
damage. completed in which case risk could be financing cost / lost revenue commissioning process in experienced subcontractors
shared. impact is typically very high terms of ensuring that any and by appropriate timetable
IP right compared to the individual rights that it has to and budget contingency.
breach/infringement. The Private Partner takes labour dispute
risk unless such labour disputes are component parts of the project comment on design
Quality assurance political in nature or, in some jurisdictions, that can affect this. Ensuring development and testing
standards. nationwide. that the programme for results does not
completion of the works has adversely delay the
Defects. The Private Partner also takes sufficient float periods for all project.
Subcontractor Subcontractor insolvency risk or the risk of critical stages and that parties
a dispute with its Subcontractor causing Similarly the Contracting
disputes/insolvency. are incentivised to work together
delay. Authority may need to
Cost overruns where to achieve the common take responsibility for
no compensation /relief The Private Partner takes the risk of IP deadlines may be more effective delays caused by failure
event applies. right infringement. strategies. of public bodies to issue
The Private Partner is required to design necessary consents in
and construct to good industry practice good time.
standards and may be required to comply The Contracting Authority
with or develop other quality assurance may seek to enter into
programmes or standards. direct IP arrangements
The Private Partner will generally have an with the light rail stock
obligation to rectify defects/defective work. designer/manufacturer to
There may be some sharing of risk in ensure it retains
respect of latent defects (for example, in necessary IP rights in the
existing assets or where due to the nature event of Private partner
of the site it is not reasonable to expect IP infringement.
the Private Partner to assess this risk prior
to contract award.).
The Private Partner takes risk of cost
overruns where no compensation or relief
event regime applies.

Construction Labour dispute. Emerging X The Private Partner assumes project It may be difficult for the Private The Contracting Authority Some emerging market rail
risk Interface/project management risk unless certain work is Partner to mitigate these may have a critical role to projects have faced significant
management. dependent on Contracting Authority integration risks solely through play at stages of the construction issues and the
Commissioning work/related infrastructure work being contractual risk allocation, as the construction, testing and Contracting Authority will need
damage. completed in which case the construction financing cost / lost revenue commissioning process in to be prepared to enforce its
risk could be shared. impact is typically very high terms of ensuring that any rights to manage the
IP right compared to the individual rights that it has to consequences of a failure by
breach/infringement. The Private Partner takes labour dispute
risk unless such labour disputes are component parts of the project comment on design the Private Partner to meet
Quality assurance political in nature or, in some jurisdictions, that can affect this. Ensuring development and testing the construction milestones. In
standards. nationwide. that the programme for results does not an emerging market context
completion of the works has adversely delay the the dynamics may be different
Defects. The Private Partner also takes sufficient float periods for all if the lenders have a

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
Subcontractor Subcontractor insolvency risk or the risk of critical stages and that parties project. significant underwrite of their
disputes/insolvency. a dispute with its Subcontractor causing are incentivised to work together Similarly the Contracting senior debt.
Cost overruns where delay. to achieve the common Authority may need to Late completion of
no compensation /relief The Private Partner takes the risk of any deadlines may be more effective take responsibility for rehabilitation or service
event applies. IP right infringement. strategies. delays caused by failure extension works are most
The Private Partner is required to design of public bodies to issue often addressed as lost
and construct to good industry practice necessary consents in opportunity for revenue by the
standards and may be required to comply good time. Private Partner. There may
with or develop other quality assurance also be a longstop date for
programmes or standards. completion.

The Private Partner will generally have an


obligation to rectify defects/defective work.
There may be some sharing of risk in
respect of latent defects (for example, in
existing assets or where due to the nature
of the site it is not reasonable to expect
the Private Partner to assess this risk prior
to contract award).
The Private Partner takes risk of cost
overruns where no compensation or relief
event regime applies.

Completion The risk of Developed X The Private Partner will bear principal The Contracting Authority may The Contracting Authority In developed markets,
(including delay commissioning the responsibility for delay and cost overrun wish to implement a multi-staged may have a critical role to enforcement of construction
and cost asset on time and on risk, and will typically manage this through completion process to ensure play at stages of the deadlines and budgets may
overrun) risk budget and the the engagement of a suitable EPC the Private Partner begins construction, testing and be easier as the Private
consequences of contractor. receiving payment for its design commissioning process in Partner will typically have
missing either of those The principal risk arising out of delay will and construction services once terms of ensuring that any more experience and reliable
two criteria. be the loss of expected revenue, the significant components of the rights that it has to resources.
ongoing costs of financing construction, project are substantially comment on design
holding costs of other contractors and completed. This can help development and testing
extended site costs. increase cash flow during results do not adversely
construction, reduce the Private delay the project.
The Private Partner is best placed to Partner’s financing costs and
integrate complex civil works, the delivery The Contracting Authority
incentivize the phasing of may allow for certain
and commissioning of rolling stock, construction works in order to
despatching and operations, and relief events, delay events
ensure critical components are or force majeure events
preventative and lifecycle maintenance to completed on time. Financial
ensure a reliable and punctual service for where delays or cost
penalties and liquidated overruns have arisen
an efficient price. This may be managed damages can help enforce
through a single EPC joint venture or by from either the fault of the
construction deadlines. Contracting Authority, or
the Private Partner managing a series of
works, supply and The combination of (i) incentives no-fault events.
operation/commissioning contracts. or penalties for timely Similarly the Contracting
completion and (ii) the Authority may need to
The Private Partner will be expected to implementation of a “longstop
demonstrate adequate system take responsibility for
date” (a date which is pegged to delays caused by the
performance before it is given permission a prescribed time period after
to operate the system. Light rail projects failure of public bodies to
the scheduled completion date) issue necessary consents

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
require complex commissioning and will create the necessary tension in good time.
testing regimes given the intricacies to incentivize timely completion
involved in ensuring that the rolling stock, while allowing the Private
power systems, signalling systems, Partner a reasonable amount of
operations centre and the wider system time to meet its contractual
will meet the necessary reliability and responsibilities in spite of delays
punctuality requirements of the output before the Contracting Authority
specifications. can terminate the project.
A Dutch project follows the same The Contracting Authority may
principles regarding responsibility, risk also consider the inclusion of a
allocation and possible relief events (i.e. look forward test to trigger a
delay events, delayed completion events default if an independent party
and compensation events).A look forward certifies that completion will not
test applies in the event it has become be achieved by the longstop
evident that the commissioning shall not date.
be achieved within the set timeframe. This
can lead to termination of the contract.

Completion The risk of Emerging X The Private Partner will bear principal It may be difficult for the Private The Contracting Authority Some emerging market rail
(including delay commissioning the responsibility for delay and cost overrun Partner to mitigate these may have a critical role to projects have faced significant
and cost asset on time and on risk, and will typically manage this through integration risks solely through play at stages of the construction issues and the
overrun) risk budget and the the engagement of a suitable EPC or contractual risk allocation, as the construction, testing and Contracting Authority will need
consequences of EPCM contractor. financing cost / lost revenue commissioning process in to be prepared to enforce its
missing either of those The principal risk arising out of delay will impact is typically very high terms of ensuring that any rights to manage the
two criteria. be the loss of expected revenue, the compared to the individual rights that it has to consequences of a failure by
ongoing costs of financing construction component parts of the project comment on design the Private Partner to meet
and extended site costs. that can affect this. Ensuring development and testing the construction milestones. In
that the programme has results does not an emerging market context
The Private Partner is best placed to sufficient float periods for all adversely delay the the dynamics may be different
integrate complex civil works, the delivery critical stages and that parties project. if the lenders have a
and commissioning of rolling stock, are incentivised to work together significant underwrite of their
despatching and operations, and Similarly the Contracting
to achieve the common Authority may need to senior debt.
preventative and lifecycle maintenance to deadlines may be more effective
ensure a reliable and punctual service for take responsibility for The management of
strategies. delays caused by failure completion risk is typically
an efficient price. This may be managed
through a single EPC joint venture or by of public bodies to issue addressed by having either: (i)
the Private Partner managing a series of necessary consents in a scheduled completion date
works, supply and good time. (with attached liquidated
operation/commissioning contracts. damages for delay) followed
by a fixed concession period
The Private Partner will be expected for operation, or (ii) the
demonstrate adequate system scheduled construction period
performance before it is given the permit forming part of the fixed
to operate the system. Light rail projects concession period (with
require complex commissioning and extensions for certain events
testing regimes given the intricacies such as force majeure). With
involved in ensuring that the rolling stock, the latter scenario, in
power systems, signalling systems, emerging markets, the
operations centre and the wider system Contracting Authority may
will meet the necessary reliability and attempt to additionally impose

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
punctuality requirements of the Output delay liquidated damages on
Specification. the Private Partner. However
this decision should always be
assessed against the
likelihood that genuine out-of
pocket costs will actually be
incurred for such delay, so as
to avoid unnecessary
contingency being built into
the project (which then
increases the ‘price’).

Performance/ The risk that the asset Developed X The Private Partner bears the risk of The onus falls upon the Where certain In developed markets, the
price risk is able to achieve the meeting the performance specification. Contracting Authority to draft performance indicators Contracting Authority should
output specification However, the Contracting Authority is attainable standards based on cannot be met due to have access to various data
metrics and the price or responsible for enforcing the regime and relevant market data and policy actions by the Contracting sources to develop realistic
cost of doing so. for ensuring that the output specifications objectives. Performance based Authority or unforeseen and attainable performance
Damage pollution are properly tailored to what the Private on train reliability, availability, circumstances, the specifications and models.
accidents. Partner can deliver. Consideration needs punctuality and quality of service Private Partner may be
to be given to the ability of the Private can be measured against pre- eligible to seek relief or
Meeting handback determined schedules or compensation.
requirements Partner to achieve the necessary
performance levels, and the standards.
Health and safety appropriateness of metrics given the While this is correct in the
vandalism. nature of the project. In a Dutch project general sense, in the Dutch PPP
Equipment becoming this would be different. The Contracting market the Private Partner will
prematurely obsolete. Authority provides the Output enter into dialogue sessions with
Specifications at the start of the tender the Contracting Authority in
Expansion.
and any candidates will have to base their order to determine the definite
submissions on those specifications. Output Specifications requested
During the dialogue sessions in the tender for the project.
phase, the output specifications can be
changed or further detailed (ensuring level
playing field between the candidates to
abide by the public procurement
principles).
In an availability based payment structure
the Private Partner may be subject to
abatement if performance based
standards are not met.

Performance/ The risk that the asset Emerging X The Private Partner bears the risk of In projects expecting extremely Where certain For emerging markets,
price risk is able to achieve the meeting the performance specification. high ridership the Contracting performance indicators particularly in the case of
output specification The Contracting Authority bears the risk of Authority, it may be difficult to cannot be met due to market first projects, the
metrics and the price or enforcing the regime and for ensuring that achieve a meaningful punctuality actions by the Contracting preparation of attainable
cost of doing so. the output specification is properly tailored / headway metric; it may be Authority or unforeseen standards by the Contracting
Damage, pollution to what the Private Partner can deliver. appropriate to focus on requiring circumstances, the Authority is complicated by
accidents. the Private Partner to provide a Private Partner may be the lack of relevant market
Consideration needs to be given to the volume driven output service. eligible to seek relief or data.
Meeting handback ability of the Private Partner to achieve the compensation.
necessary performance levels given the The Private Partner may need to

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
requirements. nature of the project and the emerging require the Contracting Authority
Health and safety. market in which it will be based. to reduce the performance
requirements during the settling
Vandalism. in period and possibly readjust
Equipment becoming the performance metrics once
prematurely obsolete. the performance of the system
has settled down. This would
Expansion.
mitigate the risk of long-term
Segregation from performance failure.
traffic.
To the extent possible the route
should be segregated from other
traffic (eg road traffic or National
Railway traffic) and the Private
Partner should be given
appropriate relief arising out of
any interface issues between
existing lines/projects.

Resource or The risk that the supply Developed X The Private Partner bears the principal The Contracting Authority will be Monthly payments to the Developed markets generally
input risk of inputs or resources responsibility to ensure an uninterrupted allowed to monitor the supply of Private Partner may do not experience market
required for the supply of inputs/resources for the project required resources, and may include certain volatility to the extent of
operation of the project and to manage the costs of those inputs. allow for the Private Partner to calculations that could emerging markets, and
is interrupted or the substitute resources if alleviate uncontrollable resource availability is less of
cost increases. necessary. cost increases due to a concern, however energy
The Private Partner may be increases in energy costs costs may still vary
incentivized, through a sharing that would otherwise be significantly over the course of
mechanism, to increase borne by the Private project that must be
efficiencies in energy Partner. accounted for.
consumption throughout the
concession period.

Resource or The risk that the supply Emerging X The Private Partner bears the principal Some of the cost risk can be The Contracting Authority Emerging markets are
input risk of inputs or resources responsibility to ensure an uninterrupted managed on demand-risk may need to stand behind generally more susceptible to
required for the supply of inputs/resources for the project projects by passing the risk the cost risk for certain market volatility and major
operation of the project and to manage the costs of those inputs. through to the user by way of inputs, or at least cost variations. See comment
is interrupted or the There may be specific instances where fare adjustments, but the ability underwrite the Private on exchange rate for a light
cost increases. the Private Partner may need the share to do this may be limited as light Partner’s financing for rail project in emerging
this risk with the Contracting Authority, rail projects tend to be highly these costs. markets.
such as availability of energy supply, or demand elastic (i.e. fares go up
reliance on local source materials where and ridership goes down).
these may be affected by labour disputes, Lenders may look to sponsors
embargos or other political risks. for completion support.
Time and cost risks are normally passed
on to the Private Partner’s subcontractors.

Demand risk The availability by both Developed X The default position for light rail projects in As it will be absorbing this As the Contracting In developed markets, the
volume and quality developed markets is for the Contracting demand risk, the Contracting Authority will be retaining Contracting Authority should

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
along with Authority to retain demand and farebox Authority should do a full demand risk, it will need have access to various data
transportation of risk (risk of passenger numbers and total assessment of demand risk and to ensure that it is sources to develop realistic
resource or inputs to a revenue receipt). should ensure that the comfortable (both and attainable ridership and
project or the demand Where the demand risk is allocated to the concession agreement politically and revenue forecasts, such that
for the product of Private Partner, or the extent that farebox appropriately addresses and economically) with the Contracting Authority is
service of a project by revenue may be insufficient to cover the allocates the risk for everything demand forecasts. well placed to manage
consumers/users. cost of financing and operating the project that will impact on demand. demand and farebox risk.
in question, as well as meeting the likely The parties should also develop
project contingencies, then some form of a comprehensive market
taxation-based support within the payment strategy to deal with the
structure will be required, and the implementation of the project.
Contracting Authority may need to retain
an element of demand risk.
In a Dutch project, the demand risk
remains with the Contracting Authority.

Demand risk The availability by both Emerging X The default position for light rail projects in Both the Contracting Authority There may need to be an Most demand risk light-rail
volume and quality emerging markets is for the Private and Private Partner should do a element of subsidy from projects in the world have
along with Partner to retain demand and farebox risk full assessment of demand risk the Contracting Authority over- estimated ridership and
transportation of (risk of passenger numbers and total and should ensure that the if demand falls below a revenue forecasts, and
resource or inputs to a revenue receipts). concession agreement certain amount. If this is restructurings have been
project or the demand To the extent that farebox revenue may appropriately addresses and structured as a “cap and common. This creates a
for the product of be insufficient to cover the cost of allocates the risk for everything collar” arrangement then difficulty for Contracting
service of a project by financing and operating the project in that will impact on demand. the Contracting Authority Authorities in emerging
consumers/users. question, as well as meeting the likely The parties should also develop should also start to markets, particularly in the
Competing lines or project contingencies, then some form of a comprehensive market benefit from economic case of market first projects,
modes of transport. taxation-based support within the payment strategy to deal with the upsides above the Private where there is likely to be a
structure will be required, and the implementation of the project. Partner’s base case. lack of relevant comparative
Contracting Authority may need to retain Some projects now ask market data to begin with.
The Contracting Authority could
an element of demand risk. undertake for the duration of the bidders to price their
term of the project not to permit subsidy needs,
the construction or operation of developing a hybrid
any parallel railway demand risk/availability
infrastructure which would model.
compete substantially with the If there is high uncertainty
Private Partner’s passenger over passenger
transport services. This projections and
undertaking could also extend to uncertainty over revenues
other competing modes of (due to tariff limitations
transport (eg buses or and/or currency volatility)
trolleybuses) developed within a then the project may need
certain radius of the route which to be structure purely on
would result in the avoidance of the basis of an availability
passenger fares which would fee.
otherwise be paid to the Private
Partner.

Maintenance The risk of maintaining Developed X The Private Partner will have principal The Contracting Authority should Generally speaking, the In developed markets, the
the asset to the responsibility for meeting the appropriate take time to ensure that the Contracting Authority’s involvement of the Private

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
risk appropriate standards standards regarding maintenance as set output specification properly undue interference with Partner in the operation,
and specifications for out in the output specifications defined by defines the maintenance the Private Partner’s maintenance and
the life of the project. the Contracting Authority. obligations on the Private provision of maintenance rehabilitation of the project
Increased maintenance The Private Partner generally assumes Partner to ensure that the and rehabilitation services provides several benefits by
costs due to increased the overall risk of periodic and system remains robust in the (with the exception of incentivizing greater care and
volumes. preventative maintenance, emergency event of early termination or minor management diligence by the Private
maintenance work, work stemming from expiry of the agreement. services) reduces the Partner in the construction
Incorrect estimates and benefits of the DBFOM phase, and increasing the
cost overruns. design or construction errors, The primary role of the
rehabilitation work, and in certain project Contracting Authority is to project model. useful life of the infrastructure.
model instances, work stemming from properly define the output The Contracting Authority
implementing technological or structural specifications and level of may be required to
changes. services required of the Private guarantee and proactively
The Contracting Authority may retain the Partner. manage the maintenance
responsibility of performing certain soft Further, the Contracting of the existing systems
services (e.g. cleaning, security, minor Authority may establish a that integrate with the
management services, etc.) where facilities management committee project.
economical. to oversee the Private Partner’s
Note that on demand-risk projects, the performance of the maintenance
Private Partner takes the primary risk that and rehabilitation services, along
the system will be maintained to a with a formal mechanism to
sufficient level of quality and reliability to discuss and resolve
ensure that it can attract business. performance related issues.
However where the system constitutes an Adequate performance by the
essential public service or effective Private Partner can be further
monopoly operation over that route, it enforced by ensuring that the
would be sensible for the Contracting payment mechanism considers
Authority to include appropriate KPIs to quality and service failures. The
monitor the service levels and take Contracting Authority will be
effective enforcement action (e.g. through allowed to adjust payment to the
penalties or reduced farebox Private Partner based on
entitlements). meeting or failing to meet certain
Where there is integration of the system performance standards. There
into existing infrastructure, the Contracting may also be other remedies
Authority may need to retain the such as warning notices and
maintenance risk associated with some of right to replace subcontractors.
the existing assets.
In a Dutch project, which is availability-
based, the infrastructure is to be kept in
accordance with the requirements as set
out in the output specifications. The
Private Partner also has to build the
municipal infrastructure surrounding the
tram infrastructure, but the maintenance
of the municipal infrastructure is
transferred on completion. Through
deductions on the availability payable by
the Contracting Authority to the Private
Partner, the Contracting Authority can

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Government Support
Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
enforce maintenance requirements (e.g. if
performance standards are not met).

Maintenance The risk of maintaining Emerging X The Private Partner will have principal The Contracting Authority should The Contracting Authority Some projects in emerging
risk the asset to the responsibility for maintaining the system take time to ensure that the may be required to markets have been procured
appropriate standards to the appropriate standards set out in the output specification properly guarantee and proactively on a D&B basis with a view to
and specifications for output specification defined by the defines the maintenance manage the maintenance then passing over the assets
the life of the project. Contracting Authority. obligations on the Private of the existing systems to an operations
Increased maintenance Note that on demand-risk projects, the Partner to ensure that the that integrate with the concessionaire. In this case
costs due to increased Private Partner takes the primary risk that system remains robust in the project. the Contracting Authority will
volumes. the system will be maintained to a event of early termination or need to ensure that it has
sufficient level of quality and reliability to expiry of the agreement. sufficient warranties of the
Incorrect estimates and system components and
cost overruns. ensure that it can attract business. Failure to get the output
specification right for the project rolling stock to allow the
However, where the system constitutes an operator to manage the
essential public service or effective effectively transfers the risk back
to the Contracting Authority. ongoing maintenance risk.
monopoly operation over that route, it
would be sensible for the Contracting
Authority to include appropriate KPIs to
monitor the service levels and take
effective enforcement action (e.g. through
penalties or reduced farebox
entitlements).
Where there is integration of the system
into existing infrastructure, the Contracting
Authority may need to retain the
maintenance or latent defect risk of some
of the existing assets and fit for purpose
standards appropriately adjusted.

Force majeure The risk that Developed X Force majeure is a shared risk and there Project insurance (physical Generally speaking, On developed market
risk unexpected events will be a fairly well developed list of events damage and loss of revenue where parties are unable transactions, the Contracting
occur that are beyond that entitles the Private Partner to relief. coverage) is the key mitigant for to agree on a way forward Authority typically
the control of the Typical events include (i) war, armed force majeure risks that cause following a force majeure compensates the Private
parties and delay or conflict, terrorism or acts of foreign physical damage. event, an amount of Partner, only for its
prohibit performance. enemies; (ii) nuclear or radioactive On an availability based project, compensation should outstanding debt (but not for
contamination; (iii) chemical or biological the risk of disruption as a result continue to be payable by its expected rate of return) for
contamination; (iv) pressure waves of no-fault events could be the Contracting Authority termination arising from a
caused by devices traveling at supersonic mitigated by relaxing the to the Private Partner in “natural” force majeure.
speeds; or (v) discovery of any species-at- performance thresholds (e.g. order to service the
risk, fossils, or historic or archaeological requiring a lower level of Private Partner’s debt
artefacts that require the project to be acceptable service, which then obligations during the
abandoned. In a Dutch project a allows the Private Partner to course of the event.
disruption in the financial markets prior to take the risk of a certain number Where the project is
Financial Close and natural disasters are of day-to-day adverse events terminated, the
also typically included as a force majeure typical to a project of this nature Contracting Authority may
event, while item (v) in the foregoing list is but without incurring be required to fully
not. performance penalties). compensate the Private
Partner for debt owed to
Force majeure events occurring during the lenders. Whether the

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
construction will also cause a delay in debt will be kept whole in
revenue commencement. The ability of such a scenario, will be a
the Private Partner to bear this risk for key area of focus for
uninsured risks will be limited, and the prospective lenders as
Contracting Authority will typically have to part of their initial credit
bear the risk after a certain period of time assessments.
or level of cost has been exceeded.
During operation, the impact of the force
majeure will depend on whether the
project is availability based (where relief
from KPI penalties may be required) or is
demand-based (where an element of fare
subsidy may be required).
In a Dutch project, the occurrence of a
force majeure event will obligate the
Contracting Authority to pay
compensation to the Private Partner.
Additionally, if the force majeure event
continues for more than 180 days the
parties may decide to terminate the
agreement.

Force majeure The risk that Emerging X Force majeure is a shared risk and you Project insurance (physical See comments on the risk On emerging market
risk unexpected events would expect to see a fairly well damage and loss of revenue of uninsurability for a light transactions, the Contracting
occur that are beyond developed list of events that entitle the coverage) is the key mitigant for rail project in emerging Authority often does not
the control of the Private Partner to relief. force majeure risks that cause markets. provide any compensation for
parties and delay or Typical events could include: physical damage. termination arising from a
prohibit performance. Force majeure events that do “natural” force majeure, on the
- natural force majeure events, which grounds that this should be
typically can be insured (eg fire / flooding / not cause physical damage and
which are outside the insured.
storm, vandalism etc), and
- force majeure events which typically On an availability based project,
cannot be insured (eg strikes / protest, the risk of disruption as a result
terror threats / hoaxes, suicide / accident, of no-fault events could be
passenger emergency, collision / mitigated by relaxing the
derailment, emergency services, trespass performance thresholds (e.g.
etc.) requiring a lower level of
acceptable service, which then
Force majeure events occurring during allows the Private Partner would
construction will also cause a delay in take the risk of a certain number
revenue commencement. The ability of of day-to-day adverse events
the Private Partner to bear this risk for typical to a project of this nature
uninsured risks will be limited, and the but without incurring
Contracting Authority will typically have to performance penalties).
bear the risk after a certain period of time
or level of cost has been exceeded. Alternatively the project may be
subject to abatement but
During operation, the impact of the force excused from non-
majeure will depend on whether the performance/breach.
project is availability based (where relief

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
from KPI penalties may be required) or is
demand-based (where an element of fare
subsidy may be required).

Exchange and The risk of currency Developed X The Private Partner would look to mitigate Exchange and interest rates The Contracting Authority In developed markets, the risk
interest rate risk fluctuations and or the this risk through hedging arrangements risks are typically not accounted is not expected to assist of currency fluctuations and
interest rate over the under the Finance Documents, to the for beyond the Private Partner’s the Private Partner in interest rates is not substantial
life of a project. extent possible or necessary in that own hedging arrangements. mitigating such risks. enough to require the
market. However in some Contracting Authority to
In a Dutch project the Private Partner circumstances the provide support.
could also enter into new Financing Contracting Authority may
Agreements (subject to certain conditions) seek to retain interest rate
and the Contracting Authority would also risk if it feels it can bear
be able to request the Private Partner to the risk more efficiently
investigate the possibilities for refinancing than the private sector.
if the market in general is in a position to
offer more favourable conditions.

Exchange and The risk of currency Emerging X The Private Partner would look to mitigate Some of the cost risk can be As fares will be collected In emerging market rail
interest rate risk fluctuations and or the this risk through hedging arrangements managed on demand-risk in local currency the projects, the devaluation of
interest rate over the under the Finance Documents, to the projects by passing the risk Contracting Authority may local currency beyond a
life of a project. extent possible in that market. through to the user by way of need to retain the risk of certain threshold may be a
In certain countries this may not be fare adjustments, but the ability devaluation of the local trigger for non-default
possible due to exchange / interest rate to do this may be limited as light currency to the extent that termination. Alternatively it
volatility. rail projects tend to be highly such devaluation impacts could trigger a “cap and collar”
demand elastic (i.e. fares go up on the economic viability subsidy arrangement from the
and ridership goes down). of the project (due to the Contracting Authority. Issues
need to pay for foreign of convertibility of currency
currency imports and and restrictions on repatriation
service foreign currency of funds are also bankability
debt). issues upon termination in
emerging markets.

Insurance risk The risk that insurance Developed X Where risks become uninsurable there is As part of the feasibility study The Contracting Authority In developed market
for particular risks is or typically no obligation to maintain the Contracting Authority and may need to consider transactions, as neither party
becomes unavailable. insurance for such risks. Private Partner should consider whether it stands behind can better control the risk of
If an uninsured risk event occurs, the whether insurance might unavailability of insurance coverage becoming
parties may agree to negotiate in good become unavailable for the insurance, in particular unattainable, this is typically a
faith risk allocation going forward, while project given the location and where this has been shared risk.
allowing for the termination of the project if other relevant factors. caused by in-country or Where the cost of the required
an agreement cannot be reached. The regional events or insurance increases
Contracting Authority may choose to circumstances. significantly, the risk is
assume responsibility for the uninsurable typically shared by either
risk, while requiring the Private Partner to having an agreed cost
regularly approach the insurance market escalation mechanism up to
to obtain any relevant insurance. ceiling or a percentage
If the uninsured risk is fundamental to the sharing arrangement - this
project (e.g. physical damage cover for allows the Contracting
major project components) and the parties Authority to quantify the
contingency that has been

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
are unable to agree on suitable priced for this risk.
arrangements then the Private Partner In circumstances where the
may need an exit route (e.g. termination of required insurance becomes
the project on the same terms as if it were unavailable, the Contracting
an event of force majeure) if it cannot Authority is typically given the
reinstate the project on an economic option to either terminate the
basis. project or to proceed with the
In a Dutch project, the Contracting project and effectively self-
Authority will also have the option to insure and pay out in the
terminate the agreement and compensate event the risk occurs.
the Private Partner in accordance with the
compensation provided for force majeure.

Insurance risk The risk that insurance Emerging X Where risks become uninsurable there is As part of the feasibility study The Contracting Authority On emerging market
for particular risks is or typically no obligation to maintain the Contracting Authority and may need to consider transactions, the Contracting
becomes unavailable. insurance for such risks. Private Partner should consider whether it stands behind Authority typically does not
If an uninsured risk event occurs, the whether insurance might unavailability of take the risk of uninsurability
Private Partner will typically have to bear become unavailable for it given insurance, in particular arising on the project,
this risk. the location and other factors where this has been although there are good
relevant to the project. caused by in-country or grounds to say that it should
If the uninsured risk is fundamental to the regional events or do so if the Private Partner
project (e.g. physical damage cover for circumstances. has no protection for the
major project components) then the consequences of a natural
Private Partner may need an exit route force majeure that becomes
(e.g. force majeure termination) if it cannot uninsurable.
reinstate the project on an economic
basis.

Political risk The risk of Government Developed X The Contracting Authority will bear The Contracting Authority will This type of issue will The type of political risk
intervention, responsibility for political events outside outline certain political events as typically lead to a events that occur in
discrimination, seizure the Private Partner’s control, and the delay events, compensation termination event where developed markets are likely
or expropriation of the Contracting Authority will be responsible events excusing causes (relief the Contracting Authority more subdued and less
project. should it fail to continually provide the from payment deductions) that will need to stand behind drastic than emerging
Public sector Private Partner with the license and involve a breach of obligations debt and equity. markets. As such, political risk
budgeting. access to the system and surrounding or interference by the insurance is not typically
lands necessary to allow the Private Contracting Authority with the obtained.
Partner to fulfil its obligations. project.
In a Dutch project this is generally not
included in the agreement, other than the
Contracting Authority having a general
obligation to provide access to the site.

Political risk The risk of Government Emerging X The Contracting Authority typically bears The Contracting Authority will This type of issue will Investors and commercial
intervention, responsibility for political events outside need to ensure that other typically lead to a lenders may also be able to
discrimination, seizure the Private Partner’s control (which will Government departments keep termination event where cover themselves by use of
or expropriation of the include ensuring that there are sufficient in line with the project objectives the Contracting Authority political risk insurance, leaving
project. funds to meet any Contracting Authority and will need to actively manage will need to stand behind this risk to be managed by the
Public sector payment obligations). the various stakeholders in the debt and equity insurer against the
budgeting. This concept may include any “material project to achieve this. potentially with a Contracting Authority.

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
adverse Government action” (broadly Government guarantee.
speaking any act or omission of any
Government entity which has a material
adverse impact on the Private Partner’s
ability to perform its obligations and/or
exercise its rights under the concession)
and may also include a specific list of
events of a political nature such as
expropriation, interference, general
strikes, discriminatory changes in law, as
well as more general uninsurable events
such as risks of wars / riots / embargos
etc.
The Private Partner would expect not only
compensatory relief but also an ability to
exit the project if the political risks
continue for an unacceptable duration.

Regulatory/cha The risk of law Developed X The risk of change in law sits mostly with Change in law risk that is Past concession models Projects in the rail sector
nge in law risk changing and affecting the Contracting Authority but there will be retained by the Private Partner (including that developed involve a close interaction with
the ability of the project a degree of risk sharing in the following may be mitigated by indexation in the UK) used to require passengers and safety
to perform and the manner: provisions (on the basis that the Private Partner to regulation plays a paramount
price at which The Private Partner will be kept whole in general changes in law will assume, and price for, a role. A change in health and
compliance with law respect of changes in law which are: (i) affect the market equally and specified level of general safety legislation may well be
can be maintained. Discriminatory (to the project or the should be reflected in general change in law capex risk of general effect but may have
Change in taxation. Private Partner) (ii) Specific (to the rail inflation). during the operational a disproportionate effect on
sector or to PPP projects in the Change in law risk may also be period, before the rail sector. For this reason
jurisdiction) or (iii) general change in law mitigated where there is an compensation would be some light rail projects have
affecting capital expenditures. A change ability to pass back changes in paid. The UK adapted the standard
in law is often subject to a de minimis the tariff charged on the project. Government ultimately definitions of
threshold before the Private Partner is This is less commonly available decided that this discriminatory/specific change
entitled to compensation on light rail projects which tend allocation did not in law to include any changes
to be structured on an represent value for in law having such an effect.
The Private Partner will not be money and reversed this
compensated for general changes in law availability-payment basis rather
than a traffic-risk/farebox basis. position. Some countries
that only affect operational expenditure or which adopted the SOPC
taxation (i.e. affect the market equally). Some projects only permit the model had already taken
Changes in law will always entitle the Private Partner to claim relief for this approach.
Private Partner to a Variation where this is general changes in law Accordingly the
necessary to avoid an impossible occurring after completion of Contracting Authority
obligation. If this cannot be achieved the construction. This approach may should be mindful of how
Private Partner will typically be entitled to be justified if the country's legal it will fund these changes
terminate as if a Contracting Authority regime ensures that the should they arise -
breach had occurred. prevailing legal regime at the changes in fares may be
In a Dutch project, there is no reference in start of construction is fixed until possible but given the
relation to a requirement for an the works are complete (i.e. high demand elasticity in
“impossible obligation” to allow a does not operate retrospectively the rail sector this may
Variation. to projects in progress). have a detrimental effect
In a Dutch project, a Private on ridership.
The Private Partner will be entitled to a

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
Variation due to a change in law in the Partner can claim compensation
event that the change in law is focused on regarding a change in law if the
the Private Partner (or similar change takes effect on a date
contractors), requires an investment in set a limited number of months
capital (costs normally written of in more prior to Financial Close and a
than 1 year) and results in an increase in contractor could not have
costs over a specific threshold. reasonably foreseen that date.

Regulatory/cha The risk of law Emerging X The Contracting Authority typically bears The Contracting Authority will Some projects may also In emerging markets, the
nge in law risk changing and affecting principal responsibility for changes in law need to ensure that various provide for a stabilisation Private Partner is likely to
the ability of the project post-bid / post-contract signature. Government departments keep clause that entrenches have a greater level of
to perform and the There may be a degree of risk sharing the project in mind when passing certain legal positions protection from changes in
price at which with the Private Partner and there may be new laws to ensure that the (such as the current tax law to reflect the greater risk
compliance with law certain risks that the Private Partner is Private Partner is not regime) against any of change (including both
can be maintained. expected to bear alongside the remainder inadvertently affected. future changes in law. likelihood and consequences)
Change in taxation. of the market. The various Government This may require a level and in order to attract
departments that may impact on of parliamentary investors to the project. In that
The Private Partner would look to be kept ratification of the way, the Contracting Authority
whole in respect of changes of law which the project should therefore be
cognisant of the risk allocation in concession agreement. would be expected to assume
are discriminatory (towards the project or more change in law risk than
the Private Partner), or specific (to the the project when passing laws However, the stabilisation
and regulations that may have method is generally not compared to a project in a
light rail or transport sector). developed market.
an impact on it. favoured by Governments
The Private Partner may also receive or NGOs (e.g. because of
protection against other (general) changes the concept of Private
in law, however the level of protection will Partner immunity from
reflect the Private Partner’s ability to updates to environmental
mitigate this risk (through the tariff or laws, for example).
inflation regime, if applicable) and whether
the risk is of general application to the
market (e.g. an increased tax on
corporate tax or dividends across the
board). It may also be appropriate for the
Private Partner to bear a certain financial
level of risk before compensation
becomes payable, to ensure that claims
are only made for material changes in
circumstances.
Changes in law should always entitle the
Private Partner to a variation where this is
necessary to avoid an impossible
obligation, or otherwise should give rise to
a right to terminate (typically on a
Contracting Authority default basis).

Inflation risk The risk that the costs Developed X Inflation risks during construction are During the concession term, the The payment mechanism In developed markets,
of the project increase typically borne by the Private Partner, Private Partner will look to be may account for inflation inflation is typically minimal
more than expected. while inflation risks during the concession kept neutral in respect of both costs by incorporating the and does not experience
term will typically be primarily borne by the international and local consumer price index into fluctuations to the extent of
Contracting Authority. inflationary costs through an the monthly payments. emerging markets.
appropriate inflation uplift or tariff

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
On availability-based projects, during the adjustment regime.
concession term, the availability payment
will typically include both a fixed
component (where debt has been
hedged) and a variable component that
will include an escalation factor that
accounts for rises in costs as defined by
the consumer price index.
Demand risk projects also need the ability
to increase the fares, but this ability may
often be restricted (as fare-raising is likely
to be a sensitive political issue), and so
the Private Partner may need additional
Contracting Authority support.

Inflation risk The risk that the costs Emerging X Inflation risk is typically borne by the The Private Partner will look to The Contracting Authority The fluctuation of inflationary
of the project increase project user (on demand-risk projects) or be kept neutral in respect of both may need to provide a costs is a greater risk in
more than expected. the Contracting Authority (on availability- international and local subsidy to the Private emerging markets than it is in
based projects). inflationary costs through an Partner on demand risk developed markets and the
On availability-based projects the appropriate inflation uplift or tariff projects if the user cannot Private Partner’s expectation
availability payment will typically include adjustment regime. bear the cost increase. will be that this risk is borne
both a fixed component (where debt has and managed by the
been hedged) and a variable component Contracting Authority during
(to reflect variable financing costs and the concession term.
variable inputs such as staff and
materials).
Demand risk projects also need the ability
to increase the fares, but this ability may
often be restricted (as fare-raising is likely
to be a sensitive political issue), and so
the Private Partner may need additional
Contracting Authority support.

Strategic risk Change in shareholding Developed X The Contracting Authority wants to ensure The Contracting Authority will
of Private Partner. that the Private Partner to whom the limit the Private Partner’s
Conflicts of interest project is awarded remains involved. shareholder’s ability to change
between shareholders Any bid will be awarded on the basis of their shareholding for a period
of Private Partner. the Private Partner’s technical expertise (i.e. there is typically a lock-in for
and financial resources and for this at least the construction period)
reason the sponsors of the Private Partner and thereafter may impose a
should remain involved in the project. regime restricting change in
control without consent or where
pre-agreed criteria cannot be
met.
The tender documentation
should set out proposals for any
restrictions on the shareholders
of the Private Partner.

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Strategic risk Change in shareholding Emerging X The Contracting Authority wants to ensure The Contracting Authority will In emerging markets there is
of Private Partner. that the Private Partner to whom the limit the Private Partner’s typically more restriction on
Conflicts of interest project is awarded remains involved. shareholder’s ability to change any change of control in the
between shareholders Any bid will be awarded on the basis of their shareholding for a period Private Partner given the
of Private Partner. the Private Partner’s technical expertise (i.e. there is typically a lock-in for riskier nature of emerging
and financial resources and for this at least the construction period). market projects.
reason the sponsors of the Private Partner The tender documentation
should remain involved in the project. should set out proposals for any
restrictions on the shareholders
of the Private Partner.

Disruptive The risk that a new Developed X This risk is unlikely to be passed to the Obligation on the Private Partner Major changes would Typically not dealt with in
technology risk emerging technology Private Partner as technology is unlikely to provide service which seeks require a variation. detail in developed markets.
unexpectedly displaces to be a major component of the project. for continuous improvement for
an established minor changes. Obligation to
technology used in the operate in accordance with best
light rail sector. industry practice may also
impose some obligation on
Private partner to take on
improvements in technology.
Private Partner will also usually
have an obligation to co-operate/
interface with any new fare
collection system.

Disruptive The risk that a new Emerging X This risk is unlikely to be passed to the Obligation on the Private Partner Major changes would Typically not dealt with in
technology risk emerging technology Private Partner as technology is unlikely to provide service which seeks require a variation. detail in emerging markets.
unexpectedly displaces to be a major component of the project. for continuous improvement for
an established minor changes. Obligation to
technology used in light operate in accordance with best
rail sector. industry practice may also
impose some obligation on
Private partner to take on
improvements in technology.
Private Partner will also usually
have an obligation to co-operate/
interface with any new fare
collection system.

Early The risk of a project Developed X The level of compensation payable on A key mitigant is to make sure The lenders will require Early termination
termination being terminated before early termination will depend on the the termination triggers are not direct agreements/tri- compensation is well defined
(including any the expiry of time and reasons for termination and typically for: hair triggers and that there are partite agreements with and political risk insurance is
compensation) the monetary (1) Contracting Authority default – the adequate well-defined routes for the Contracting Authority not typically obtained due to a
risk consequences of such Private Partner would get senior debt, each party to remedy any giving the lenders step-in lesser risk of the Contracting
termination. junior debt, equity and a level of equity alleged default. rights in the case of the Authority defaulting on its
return; Contracting Authority payment obligations.
calling a default
(2) Non-default termination – the Private termination or in the event
Partner would get senior debt and equity of the Private Partner

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
return; and being in default under the
(3) Private Partner default – (a) Where the loan documentation. The
project cannot be retendered (due to lenders would typically be
political sensitivity or a lack of interested given a grace period to
parties) the Private Partner would typically gather information,
be entitled to an amount equal to the manage the project
adjusted estimated fair value of future company and seek a
payments, less the costs of providing the resolution or ultimately
services under the project/concession novate the project
agreement. (b) Where the project can be documents to a suitable
retendered, the Private Partner would be substitute concessionaire.
entitled to the amount that a new private
partner would pay for the remaining term
of the concession, less any costs incurred
by the Contracting Authority during the
retendering process.
In a Dutch project compensation will also
typically be paid to Private Partner in case
of termination due to a prolonged delay
event. This will consist of senior debt,
break costs, junior debt, equity and
contract cancellation costs of outsourcing
agreements or supply/consultant
agreements.
It is common for the senior debt to be
guaranteed as a minimum in every
termination scenario, and for rights of set-
off below that figure to be restricted. While
it may seem that project lenders are
therefore not significantly exposed to a
project default, they would not typically
have the right to call for a termination in
these circumstances, and so they are still
motivated to make the project work to
recover their loan if the Contracting
Authority chooses not to exercise its
termination rights.

Early The risk of a project Emerging X The level of compensation payable on A key mitigant is to make sure The covenant risk of the In emerging markets, there
termination being terminated before early termination will depend on the the termination triggers are not Contracting Authority may may also be sovereign
(including any the expiry of time and reasons for termination and typically for: hair triggers and that there are require a guarantee from guarantees which support the
compensation) the monetary (1) Contracting Authority default – the adequate well-defined routes for a higher level of Contracting Authorities
risk consequences of such Private Partner would get senior each party to remedy any Government to guarantee payment obligations.
termination. debt, equity and a level of equity alleged default. the level of compensation Political risk insurance may be
return; payable on termination. available and is likely to be
(2) Non-default termination – the Private The lenders will require sought to cover the risk of the
Partner would get senior debt and direct agreements with Contracting Authority or
equity; and the Contracting Authority Government guarantor

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
(3) Private Partner default – the Private giving the lenders step-in defaulting on its payment
Partner would typically get a rights in the case of the obligations.
payment that is a function of the Contracting Authority
input cost of the project (construction calling a default
value / book value) or the termination or in the event
outstanding senior debt. of the Private Partner
In many emerging markets it is common being in default under the
for the senior debt to be guaranteed as a loan documentation. The
minimum in every termination scenario, lenders would typically be
and for rights of set-off below that figure to given a grace period to
be restricted. While it may seem that gather information,
project lenders therefore not significantly manage the project
exposed to a project default, they would company and seek a
not typically have the right to call for a resolution or ultimately
termination in these circumstances, and novate the project
so they are still motivated to make the documents to a suitable
project work to recover their loan if the substitute concessionaire.
Contracting Authority chooses not to
exercise its termination rights.

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Risk Matrix 4: Heavy rail (ROT)


 Intercity rail developed as a rehabilitate, operate, transfer (ROT)
 Developed market project is based on the provision of rolling stock for use on the UK heavy rail network, in connection with a proposed infrastructure upgrade (the
Edinburgh-Glasgow Improvement Programme)
 Emerging market is based on a concession to operate and manage rail assets and to provide freight services in Uganda and Kenya

 Key risks

 Land purchase and site risk


 Completion (including delay and cost overrun) risk
 Maintenance risk

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Land purchase The risk of acquiring Developed X The UK heavy rail network is owned by The risk of delays to passenger There is no direct Unique to the UK’s heavy rail
and site risk title to the land to be Network Rail. The private sector Train services caused by the Government support, market.
used for a project, the Operating Company (Operator) is required infrastructure being in poor except insofar as the UK
selection of that site to enter into a Track Access Contract with condition is allocated under the Government provides a
and the geophysical Network Rail in respect of the particular Track Access Contract. direct grant to Network
conditions of that site. section of the Network on which it is Compensation is payable in Rail, and subsidises the
Planning permission. permitted to operate services under its specified circumstances if the agreed works programme
franchise agreement entered into between track is not available when of Network Rail. The
Access rights. the Operator and the Contracting expected. Government also has a
Security. Authority. From the Manufacturer’s statutory duty to ensure
The rolling stock manufacturer perspective, the risk is mitigated the provision of railway
Heritage.
(Manufacturer) will be required to by limiting its obligation to passenger services on
Archaeological. the UK rail network.
manufacture and supply rolling stock provide rolling stock which
Pollution. meeting the technical characteristics of meets the Technical
Latent defects. the particular section of the Network. It Requirements specified under
will also be required to maintain the rolling the MSA, and which can be
stock at a specified depot. operated on (i.e. which meets
The Manufacturer is responsible for the gauging and other technical
providing maintenance, and therefore for requirements of) specified routes
ensuring that the specified depot is (usually set out in a Schedule to
sufficient for this purpose. the MSA).

Land purchase The risk of acquiring Emerging X The Contracting Authority bears the Prior to awarding the tender the Government enforcement Land rights and ground
and site risk title to the land to be principal risk as the Private Partner is Contracting Authority could powers may be needed to conditions (in particular
used for a project, the acquiring an interest in an existing railway. (through legislation and a proper properly secure the site reliable utilities records, and
selection of that site The Contracting Authority should also consultation process) limit the for the private sector. land charges) in emerging
and the geophysical consider the impact that the project will ability for potential land right There may be historic markets may be less certain
conditions of that site. have on neighbouring properties and owners or neighbouring encroachment issues that than in developed markets
Planning permission. trades and may need to retain this risk of properties and trades to raise the Private Partner cannot where established land
unavoidable interference. claims on the land and/or for be expected to deal with. registries and utility records
Access rights. injurious affection. exist.
The Contracting Authority
Security. may be required to In the absence of legislation in
Heritage. provide additional site emerging markets, indigenous
security / assistance land rights issues and
Archaeological.
during operations. community engagement can
Pollution. be managed by the
Latent defects. Contracting Authority through
the adoption of standards
such as the IFC Safeguards
for the project, particularly in
order to ensure international
financing options are available
to the project. See comments
on “Environmental and Social
Risk” for an existing rail ROT
project in emerging markets.

Environmental The risk of the existing Developed X Network Rail will be expected to manage Network Rail would be expected None. Environmental scrutiny is
latent environmental this risk (but may get force majeure to factor in environmental increasing even in developed

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
and social risk conditions affecting the protection in certain circumstances) considerations when planning its markets, as both Private
project and the The Manufacturer will usually take this activities. Partners and Contracting
subsequent risk of risk, particularly in the context of Authorities have come under
damage to the Environmental Losses arising from increasing burdens to develop
environment or local maintenance activities. sound environmental and
communities. social risk management plans
before construction begins.

Environmental The risk of the existing Emerging X The Private Partner will have primary The Private Partner should have Government will need to International lenders and
and social risk latent environmental responsibility to manage the a comprehensive environmental take meaningful steps development finance
conditions affecting the environmental and social strategy across and social plan in place which both before and during institutions are particularly
project and the the project, however existing can be audited by project the project to manage sensitive about environmental
subsequent risk of environmental conditions which cannot be lenders and the Contracting social impacts of and social risks, as a result of
damage to the adequately catered for or priced may need Authority. construction and their commitment to the
environment or local to be retained by the Contracting operation. Equator Principles. They will
communities. Authority. Investors and lenders look very closely at how these
The Contracting Authority may also need may expect to see a plan risks are managed at both
to retain responsibility for social impacts to see how these aspects private and public sector level
which are unavoidable from the are dealt with and this and this scrutiny is helpful to
development of the project (e.g. may need to be set out in mitigate the risks posed by
compensation for expropriation of the concession these issues.
indigenous land rights and/or relocation of agreement.
urban communities / businesses).

Design risk The risk that the project Developed X Network Rail is wholly responsible for Network Rail will seek approval There is no direct In the UK’s developed rail
has not been designed infrastructure upgrades, as the party with from the relevant Contracting Government support, market, Network Rail has all
adequately for the knowledge of the UK heavy rail network. Authority in relation to any except insofar as the UK historical information as to the
purpose required. infrastructure upgrades Government provides a maintenance of the rail
Feasibility study. contemplated. direct grant to Network infrastructure, rendering it
The design of the rolling stock is Rail, and subsidises the difficult for other parties to
Approval of designs. agreed works programme take this risk.
the responsibility of the
Changes to design. Manufacturer. There will be a of Network Rail. The
detailed design review process Government also has a
set out in the MSA. The statutory duty to ensure
Manufacturer will usually the provision of railway
exclude liability for the risk of passenger services on
infrastructure upgrades being the UK rail network.
completed.

Design risk The risk that the project Emerging X The Contracting Authority may retain The Contracting Authority may The Contracting Authority Emerging market rail projects
has not been designed some design risk in certain aspects of the wish to consider how may be required to may be particularly dependent
adequately for the existing system or related works, prescriptive it should be in the guarantee and proactively on availability of reliable
purpose required. depending on how prescriptive the output specification. manage the maintenance traction power or fuel
Contracting Authority is in the output The Contracting Authority must of the existing systems availability, which have
specification. provide reasonable access and that integrate with the implications for the Private
The Private Partner will warrant that it has opportunity for the Private project. Partner’s ability to meet the
satisfied itself in relation to the existing Partner to survey condition of reliability requirements in the
assets and their condition at the existing assets. output specification.
commencement of the concession period.

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Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
The Private Partner’s ability to warrant the
fitness for purpose of its design solution
for rehabilitation works may be impacted
by the condition of the existing assets, and
the Contracting Authority will to that extent
share in the design risk.

Construction Labour dispute. Developed No standard position. Varied. Varied. Varied.


risk Interface/project In the case of rolling stock procurement, Commissioning damage will be
management. labour disputes may attract force majeure mitigated by insurance.
Commissioning protection. The other risks are the subject of
damage. Project management obligations are negotiation between the parties.
IP right imposed on each party.
breach/infringement. Commissioning damage will be the
Quality assurance Manufacturer’s risk unless it occurs during
standards. testing carried out by the Operator or a
Defective material. third party.

Latent defects. MSAs contain detailed IP right provisions.


Source Codes are usually placed into
Subcontractor escrow on the terms of an industry
disputes/insolvency. standard contract, to be released on the
Cost overruns where no occurrence of specified events such as
compensation /relief Manufacturer insolvency.
event applies. Quality assurance standards are dealt
with in the Manufacturer’s obligation to
supply rolling stock meeting a detailed
technical specification and complying with
applicable law and standards.
The Manufacturer takes the risk of
defective materials, and latent defects
(although these may be excluded in favour
of a bespoke warranty regime).
The Manufacturer takes the risk of
subcontractor disputes / insolvency.
The Manufacturer takes the risk of cost
overruns unless a Mandatory Modification
is required or a Variation is negotiated.

Construction Labour dispute. Emerging X Private Partner assumes project It may be difficult for the Private The Contracting Authority Some emerging market rail
risk Interface/project management risk in Partner to mitigate these may have a critical role to projects have faced significant
management. rehabilitation/extension works where they integration risks solely through play at stages of the construction issues and the
Commissioning are dependent on or integrated with contractual risk allocation, as the construction, testing and Contracting Authority will need
damage. Contracting Authority work/related financing cost / lost revenue commissioning process in to be prepared to enforce its
infrastructure work. impact is typically very high terms of ensuring that any rights to manage the
IP right compared to the individual rights that it has to consequences of a failure by
breach/infringement. Private Partner takes labour dispute risk
unless political. component parts of the project comment on design the Private Partner to meet
Quality assurance that can affect this. Ensuring development and testing the construction milestones. In

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
standards. Private Partner takes risk of IP right that the programme for results does not adversely an emerging market context
Defective material. infringement. completion of the works has delay the project. the dynamics may be different
Private Partner required to construct to sufficient float periods for all Similarly the Contracting if the lenders have a
Latent defects. critical stages and that parties significant underwrite of their
GIP standards. Authority may need to
Subcontractor are incentivised to work together take responsibility for senior debt.
disputes/insolvency. Private Partner takes risk of cost overrun to achieve the common
on rehabilitation or extension works where delays caused by failure Late completion of
deadlines may be more effective of public bodies to issue rehabilitation or service
Cost overruns where no no compensation/relief event applies. strategies. necessary consents in extension works are most
compensation /relief
event applies. The Private Partner will bear principal good time. often addressed as lost
responsibility for delay and cost overrun opportunity for revenue by the
risk, and will typically manage this through Private Partner. There may
the engagement of a suitable contractor. also be a longstop date for
The principal risk arising out of delay will completion.
be the loss of expected revenue, and the
ongoing costs of financing the works.
The Private Partner is best placed to
integrate complex civil works, the delivery
and commissioning of rolling stock,
despatching and operations, and
preventative and lifecycle maintenance to
ensure a reliable and punctual service for
an efficient price. This may be managed
through a single EPC joint venture or by
the Private Partner managing a series of
works, supply and
operation/commissioning contracts.
The Private Partner will be expected
demonstrate adequate system
performance before it is given the permit
to operate the system. Existing rail ROT
projects require complex commissioning
and testing regimes given the intricacies
involved in ensuring that the rolling stock,
power systems, signalling systems,
operations centre and the wider system
will meet the necessary reliability and
punctuality requirements of the Output
Specification.

Completion The risk of Developed X Network Rail retains responsibility for the Network Rail’s performance is There is no direct In relation to the infrastructure
(including delay commissioning the infrastructure and infrastructure upgrades. scrutinised by ORR which Government support, in the UK’s developed rail
and cost asset on time and on The Manufacturer is responsible for enforces its Network Licence. except insofar as the UK market, Network Rail remains
overrun) risk budget and the delivery of the rolling stock in accordance The Manufacturer is liable to pay Government provides a the party with the experience,
consequences of with a specified timetable. liquidated damages for late direct grant to Network resources and asset
missing either of those delivery of rolling stock, usually Rail, and subsidises the knowledge to take this risk.
two criteria. to both the Operator and the agreed works programme
rolling stock owner. of Network Rail. The
Government also has a
statutory duty to ensure

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
the provision of railway
passenger services on
the UK rail network.

Completion The risk of Emerging X The Private Partner will bear principal It may be difficult for the Private The Contracting Authority The management of
(including delay commissioning the responsibility for delay and cost overrun Partner to mitigate these may have a critical role to completion risk is typically
and cost rehabilitation or risk associated with bringing rehabilitated integration risks solely through play at stages of the addressed by having either: (i)
overrun) risk extension works on services back in to operations, and will contractual risk allocation, as the construction, testing and a scheduled completion date
time and on budget and typically manage this through the financing cost / lost revenue commissioning process in (with attached liquidated
the consequences of engagement of a suitable EPC contractor. impact is typically very high terms of ensuring that any damages for delay) followed
missing either of those The principal risk arising out of delay will compared to the individual rights that it has to by a fixed concession period
two criteria. be the loss of expected revenue, the component parts of the project comment on design for operation, or (ii) the
ongoing costs of financing construction that can affect this. Ensuring development and testing scheduled construction period
and extended site costs. In some that the programme has results does not adversely forming part of the fixed
instances where the railway is taken over sufficient float periods for all delay the project. concession period (with
as a going concern the Private Partner’s critical stages and that parties Similarly the Contracting extensions for certain events
right to increase tariffs will not arise unless are incentivised to work together Authority may need to such as force majeure). With
the new or upgraded works have been to achieve the common take responsibility for the latter scenario, in
completed. deadlines may be more effective delays caused by failure emerging markets, the
strategies. of public bodies to issue Contracting Authority may
The Private Partner is best placed to attempt to additionally impose
integrate complex civil works, the delivery necessary consents in
good time. delay liquidated damages on
and commissioning of rolling stock, the Private Partner. However
despatching and operations, and this decision should always be
preventative and lifecycle maintenance to assessed against the
ensure a reliable and punctual service for likelihood that genuine out-of
an efficient price. This may be managed pocket costs will actually be
through a single EPC joint venture or by incurred for such delay, so as
the Private Partner managing a series of to avoid unnecessary
works, supply and contingency being built into
operation/commissioning contracts. the project (which then
increases the ‘price’).

Performance/ The risk that the asset Developed X In relation to infrastructure, this risk is The ORR monitors performance No direct Government In the UK’s developed market,
price risk is able to achieve the taken by Network Rail alone. by Network Rail and enforces its support. Network Rail is best placed to
output specification The Manufacturer takes the entire risk of Network Licence. It can impose manage this risk, given its
metrics and the price or its own performance, subject to certain monetary penalties. experience and resources.
cost of doing so. “Permitted Delay” events under the MSA, Private sector manufacturers
Damage pollution relating to matters outside its control. would expect to take this risk
accidents. in relation to the supply of
Meeting handback rolling stock, and have the
requirements skills and experience to do so.

Health and safety


vandalism.
Equipment becoming
prematurely obsolete.
Expansion.

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary

Performance/ The risk that the asset Emerging X The Private Partner bears the risk of In projects expecting extremely Where certain For emerging markets,
price risk is able to achieve the meeting the performance specification. high demand, it may be difficult performance indicators particularly in the case of
output specification The Contracting Authority bears the risk of to achieve a meaningful cannot be met due to market first projects, the
metrics and the price or enforcing the regime and for ensuring that punctuality / headway metric; it actions by the Contracting preparation of attainable
cost of doing so. the output specification is properly tailored may be more appropriate to Authority or unforeseen standards by the Contracting
Damage pollution to what the Private Partner can deliver. focus on requiring the Private circumstances, the Authority is complicated by the
accidents. Partner to provide a volume Private Partner may be lack of relevant market data.
Consideration needs to be given to the driven output service. eligible to seek relief or
Meeting handback ability of the Private Partner to achieve the compensation.
requirements necessary performance levels given the The Private Partner may need to
nature of the project and the emerging require the Contracting Authority
Health and safety to reduce the performance
vandalism. market in which it will be based.
requirements during the settling
Equipment becoming in period and possibly readjust
prematurely obsolete. the performance metrics once
the performance of the system
Expansion.
has settled down. This would
mitigate the risk of long-term
performance failure.

Resource or The risk that the supply Developed X Network Rail takes the risk in relation to The ORR monitors performance No direct Government In the UK’s developed market,
input risk of inputs or resources any required infrastructure upgrades. by Network Rail and enforces its support. Network Rail is best placed to
required for the The Manufacturer takes the entire risk of Network Licence. It can impose manage this risk, given its
operation of the project its own performance, subject to certain monetary penalties. experience and resources.
is interrupted or the “Permitted Delay” events under the MSA, Private sector manufacturers
cost increases. relating to matters outside its control. would expect to take this risk
in relation to the supply of
rolling stock, and have the
skills and experience to do so.

Resource or The risk that the supply Emerging X The Private Partner bears the principal Some of the cost risk can be The Contracting Authority Emerging markets are
input risk of inputs or resources responsibility to ensure an uninterrupted managed on demand-risk may need to stand behind generally more susceptible to
required for the supply of inputs/resources for the project projects by passing the risk the cost risk for certain market volatility and major
operation of the project and to manage the costs of those inputs. through to the user by way of inputs, or at least cost variations. See comment
is interrupted or the There may be specific instances where tariff adjustments, but the ability underwrite the Private on exchange rate for an
cost increases. the Private Partner may need the share to do this may be limited. Partner’s financing for existing rail ROT project in
this risk with the Contracting Authority, Lenders may look to sponsors these costs. emerging markets.
such as availability of energy supply, or for completion support.
reliance on local source materials where
these may be affected by labour disputes,
embargos or other political risks.
Time and cost risk is normally passed on
to contractors.

Demand risk The availability by both Developed X Under a typical franchise agreement, this Under a typical franchise If the Contracting In developed markets, the
volume and quality risk will largely be taken by the Operator agreement, the Operator will be Authority will be retaining Contracting Authority should
along with but will be mitigated by the revenue share required to share a proportion of demand risk, it will need have access to various data
transportation of obligations imposed on the Operator and its revenue exceeding a to ensure that it is sources to develop realistic
resource or inputs to a revenue support obligations imposed on specified threshold with the comfortable (both and attainable ridership and

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
project or the demand the Contracting Authority. Contracting Authority, and will be politically and revenue forecasts, such that
for the product of Alternatively the Contracting Authority entitled to receive revenue economically) with the Contracting Authority is
service of a project by may decide to take this risk, in which case support from the Contracting demand forecasts. well placed to manage
consumers/users it will require the Operator to enter into a Authority if its revenue is below a demand and farebox risk.
management contract. specified threshold. Revenue However, within certain
share arrangements do not parameters, the Contracting
normally apply during the first 4 Authority may feel that the
years of a franchise agreement. Operator should take a degree
of this risk.

Demand risk The availability by both Emerging X The default position for existing rail ROT Both the Contracting Authority There may need to be an Most demand risk rail projects
volume and quality projects in emerging markets is for the and Private Partner should do a element of subsidy from in the world have over-
along with Private Partner to retain demand and tariff full assessment of demand risk the Contracting Authority estimated user and revenue
transportation of risk (risk of demand and total revenue and should ensure that the if demand falls below a forecasts, and restructurings
resource or inputs to a receipt). concession agreement certain amount. If this is have been common. This
project or the demand To the extent that tariff revenue may be appropriately addresses and structured as a “cap and creates a difficulty for
for the product of insufficient to cover the cost of financing allocates the risk for everything collar” arrangement then Contracting Authorities in
service of a project by and operating the project in question, as that will impact on demand. the Contracting Authority emerging markets, particularly
consumers/users. well as meeting the likely project The parties should also develop should also start to in the case of market first
contingencies, then some form of taxation- a comprehensive market benefit from economic projects, where there is likely
based support within the payment strategy to deal with the upsides above the Private to be a lack of relevant
structure will be required, and the implementation of the project. Partner’s base case. This comparative market data to
Contracting Authority may need to retain is not universally included begin with.
an element of demand risk. and does not necessarily
reflect a market practice.
If there is high uncertainty
over passenger
projections and
uncertainty over revenues
(due to tariff limitations
and/or currency volatility)
then the project may need
to be structure purely on
the basis of an availability
fee.

Maintenance The risk of maintaining Developed X Network Rail owns and is responsible for The risk of delays to passenger There is no direct Unique to the UK’s heavy rail
risk the asset to the maintaining the UK heavy rail network. It services caused by the Government support, market.
appropriate standards has built up years of experience and infrastructure being in poor except insofar as the UK
and specifications for expertise and is therefore best placed to condition are allocated under the Government provides a
the life of the project. manage this risk. Track Access Contract. direct grant to Network
Increased maintenance Some years ago, maintenance of the track Compensation is payable in Rail, and subsidises the
costs due to increased was sub-contracted to private sector specified circumstances if the agreed works programme
volumes. entities. This was not successful, as it track is not available when of Network Rail. The
resulted in increased costs and variable expected. Government also has a
Incorrect estimates and statutory duty to ensure
cost overruns. quality. Network Rail took responsibility for In addition, Network Rail is
track maintenance back in-house. required to hold a network the provision of railway
licence granted by the Office of passenger services on
Maintenance of the rolling stock is the UK rail network.
undertaken by the Manufacturer, under its Rail and Road (ORR), the UK’s

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
contract with the Operator. independent rail regulator. This
licensing regime requires
Network Rail to comply with
certain safety standards, to
maintain the rail network and to
seek to improve performance
and efficiency. The ORR
monitors Network Rail’s
performance on a continuous
basis - against targets in the
most recent access charges
review, against obligations in its
network licence and against
forecasts in its own business
plan. Where necessary, the
ORR may enforce compliance
with the network licence if
Network Rail fails to fulfil its
obligations, and the ORR may
also impose monetary penalties.
The licence also rewards
Network Rail for meeting and
exceeding targets.
The volume of services operated
on the infrastructure, and thus
the wear and tear imposed on
the infrastructure is limited to an
extent by the control exercised
by the Contracting Authority
under each Franchise
Agreement over the number of
services that can be operated.

Maintenance The risk of maintaining Emerging X The Private Partner will have principal The Contracting Authority should The Contracting Authority Some projects in emerging
risk the asset to the responsibility for maintaining the system to take time to ensure that the may be required to markets have been procured
appropriate standards the appropriate standards set out in the output specification properly guarantee and proactively on a Rehabilitation-Operate-
and specifications for output specification defined by the defines the maintenance manage the maintenance Transfer basis. In this case
the life of the project. Contracting Authority. obligations on the Private of the existing systems the Contracting Authority will
Increased maintenance Note that on demand-risk projects, the Partner to ensure that the that integrate with the need to ensure that it has
costs due to increased Private Partner takes the primary risk that system remains robust in the project. sufficient warranties of the
volumes. the system will be maintained to a event of early termination or system components and
sufficient level of quality and reliability to expiry of the agreement. If the rolling stock to allow it to
Incorrect estimates and Contracting Authority fails to get manage any maintenance risk
cost overruns. ensure that it can attract business.
However where the system constitutes an the output specification right which transfers back to the
essential public service or effective then it effectively transfers risk Contracting Authority at the
monopoly operation over that route, it back to itself. end of the concession.
would be sensible for the Contracting
Authority to include appropriate KPIs to
monitor the service levels and take

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
effective enforcement action (e.g. through
penalties or reduced tariff entitlements).
Where there is integration of the system
into existing infrastructure, the Contracting
Authority may need to retain the
maintenance risk of some of the existing
assets.

Force majeure The risk that Developed X Network Rail may seek force majeure Insurance is the expected None.
risk unexpected events relief on specific projects, for defined force mitigant.
occur that are beyond majeure events such as (a) war, terrorism, An MSA will usually terminate
the control of the (b) acts of vandalism or accidental after a force majeure event has
parties and delay or damage or destruction of machinery, been in place for a specified
prohibit performance. equipment, track or other infrastructure; period (e.g. one year).
(c) natural disasters; (d) nuclear, chemical
or biological contamination; (e) pressure
waves caused by devices travelling at
supersonic speeds; (f) discovery of fossils,
antiquities or unexploded bombs; and/or
(g) strike or other industrial action other
than involving the contract counterparty or
Network Rail.
The Manufacturer will seek comparable
force majeure relief and will also usually
seek to cover strikes, lock-outs or other
labour disputes where these are
nationwide or rail industry-wide events.

Force majeure The risk that Emerging X Force majeure is a shared risk and you Project insurance (physical See comments on the risk On emerging market
risk unexpected events would expect to see a fairly well damage and loss of revenue of uninsurability for an transactions, the Contracting
occur that are beyond developed list of events that entitle the coverage) is the key mitigant for existing rail ROT project Authority often does not
the control of the Private Partner to relief. force majeure risks that cause in emerging markets. provide any compensation for
parties and delay or Typical events could include: physical damage. termination arising from a
prohibit performance. Force majeure events that do “natural” force majeure, on the
- natural force majeure events, which grounds that this should be
typically can be insured (eg fire / flooding / not cause physical damage and
which are outside the scope of insured.
storm, vandalism etc), and
the business interruption
- force majeure events which typically insurance will cause a cash flow
cannot be insured (eg strikes / protest, issue for the Private Partner.
terror threats / hoaxes, suicide / accident, The Contracting Authority may
passenger emergency, collision / therefore grant the Private
derailment, emergency services, trespass Partner certain royalty reliefs to
etc.) allow the Private Partner to
Force majeure events occurring during prioritise its debt service
construction will also cause a delay in obligations. This relief could be
revenue commencement. The ability of provided by way of a low-interest
the Private Partner to bear this risk for “loan”, such that when revenues
uninsured risks will be limited, and the restart and exceed a certain
Contracting Authority will typically have to threshold above debt service,

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
bear the risk after a certain period of time the Contracting Authority would
or level of cost has been exceeded. be repaid the “lost” royalty
During operation, the impact of the force payments.
majeure will depend on whether the
project is availability based (where relief
from KPI penalties may be required) or is
demand-based (where an element of
Government subsidy may be required).

Exchange and The risk of currency Developed X Network Rail takes interest rate risk but Exchange and interest rates The Contracting Authority In developed markets, the risk
interest rate risk fluctuations and or the exchange rate risk should not apply. risks are typically not addressed is not expected to assist of currency fluctuations and
interest rate over the Network Rail receives its Government directly. Network Rail or the interest rates is not substantial
life of a project. funding in 5 year blocks called control Manufacturer in mitigating enough to require the
periods. such risks. Contracting Authority to
Manufacturers take interest rate risk (they provide support.
may seek to enter into hedging
arrangements). They may seek to avoid
exchange rate risk either side of a
specified contract date, but Manufacturers
usually accept this as a business risk.

Exchange and The risk of currency Emerging X The Private Partner would look to mitigate Some of the cost risk can be As tariffs will be collected In emerging market rail
interest rate risk fluctuations and/or the this risk through hedging arrangements managed on demand-risk in local currency the projects, the devaluation of
interest rate over the under the Finance Documents, to the projects by passing the risk Contracting Authority may local currency beyond a
life of a project. extent possible in that market. through to the user by way of need to retain the risk of certain threshold may be a
In certain countries this may not be tariff adjustments, but the ability devaluation of the local trigger for non-default
possible due to exchange / interest rate to do this may be limited as currency to the extent that termination. Alternatively it
volatility. existing rail ROT projects tend to such devaluation impacts could trigger a “cap and collar”
be highly demand elastic (i.e. on the economic viability subsidy arrangement from the
tariffs go up and demand goes of the project (due to the Contracting Authority. Issues
down). need to pay for foreign of convertibility of currency
currency imports and and restrictions on repatriation
service foreign currency of funds are also bankability
debt). issues upon termination in
emerging markets.

Insurance risk The risk that insurance Developed X Network Rail is required to take out Network Rail’s Network Licence None. In developed market
for particular risks is or specified insurance cover under the terms is enforced by ORR. transactions in the heavy rail
becomes unavailable. of its Network Licence. sector, each party usually
The Manufacturer will be required to take takes the risk of its own
out specified levels of insurance under the insurance.
MSA and any maintenance contract, to
include all risks property insurance,
employers' liability insurance, and third
party public and product liability insurance.
Failure to insure will typically be an event
of default.

Insurance risk The risk that insurance Emerging X Where risks become uninsurable there is The Contracting Authority and The Contracting Authority On emerging market

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Risks Allocation Mitigation Arrangements
Market Comparison
Category Description Variable Public Private Shared Rationale Measures Issues Summary
for particular risks is or typically no obligation to maintain Private Partner should consider may need to consider transactions, the Contracting
becomes unavailable. insurance for such risks. whether insurance might whether it stands behind Authority typically does not
If an uninsured risk event occurs, the become unavailable for it given unavailability of take the risk of uninsurability