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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.
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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.
SIN-#7991991-v10
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
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
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
Government Support
Market Comparison
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
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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
obligation, or otherwise should give rise to
a right to terminate (typically on a
Contracting Authority default basis).
SIN-#7991991-v10
Government Support
Market Comparison
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.
to increase the tolls, but this ability may
often be restricted (as toll-raising is likely
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
Government Support
Market Comparison
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
Government Support
Market Comparison
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)

 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
Government Support
Market Comparison
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.
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
SIN-#7991991-v10
Government Support
Market Comparison
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
SIN-#7991991-v10
Government Support
Market Comparison
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
SIN-#7991991-v10
Government Support
Market Comparison
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.
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
SIN-#7991991-v10
Government Support
Market Comparison
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
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
SIN-#7991991-v10
Government Support
Market Comparison
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
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
standards and may be required to comply
with or develop other quality assurance
programmes or standards.
to contract award).
SIN-#7991991-v10
Government Support
Market Comparison
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-
SIN-#7991991-v10
Government Support
Market Comparison
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
SIN-#7991991-v10
Government Support
Market Comparison
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
SIN-#7991991-v10
Government Support
Market Comparison
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
SIN-#7991991-v10
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Market Comparison
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
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.
SIN-#7991991-v10
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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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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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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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Market Comparison
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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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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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.
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
SIN-#7991991-v10
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Market Comparison
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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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.
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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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
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
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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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
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
airport sector). developed market.
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.
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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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
SIN-#7991991-v10
Government Support
Market Comparison
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.
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
SIN-#7991991-v10
Government Support
Market Comparison
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
SIN-#7991991-v10
Government Support
Market Comparison
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
SIN-#7991991-v10
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Market Comparison
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
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
SIN-#7991991-v10
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Market Comparison
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
SIN-#7991991-v10
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
 Construction risk
 Demand risk
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Market Comparison
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
and the geophysical That said, there may be some areas disclose such information to the through expropriation / mitigated with appropriate due
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”
SIN-#7991991-v10
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Market Comparison
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.
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
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.
SIN-#7991991-v10
Government Support
Market Comparison
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
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
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.
SIN-#7991991-v10
Government Support
Market Comparison
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
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
SIN-#7991991-v10
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Market Comparison
Contracting Authority it may become a
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.
to contract award.).
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
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
SIN-#7991991-v10
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Market Comparison
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.

to contract award).
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
SIN-#7991991-v10
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Market Comparison
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
SIN-#7991991-v10
Government Support
Market Comparison
punctuality requirements of the Output delay liquidated damages on
Specification. the Private Partner. However
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
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
SIN-#7991991-v10
Government Support
Market Comparison
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
SIN-#7991991-v10
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Market Comparison
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.
the asset to the responsibility for meeting the appropriate take time to ensure that the Contracting Authority’s involvement of the Private
SIN-#7991991-v10
Government Support
Market Comparison
risk appropriate standards standards regarding maintenance as set output specification properly undue interference with Partner in the operation,
costs due to increased the overall risk of periodic and system remains robust in the (with the exception of incentivizing greater care and
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
SIN-#7991991-v10
Government Support
Market Comparison
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.
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
SIN-#7991991-v10
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Market Comparison
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
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.
SIN-#7991991-v10
Government Support
Market Comparison
demand-based (where an element of fare
subsidy may be required).
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.
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
SIN-#7991991-v10
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Market Comparison
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.
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
(e.g. force majeure termination) if it cannot uninsurable.
basis.
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.
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.
SIN-#7991991-v10
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Market Comparison
adverse Government action” (broadly Government guarantee.
exercise its rights under the concession)
and may also include a specific list of
strikes, discriminatory changes in law, as
etc.
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
SIN-#7991991-v10
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Market Comparison
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
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
cognisant of the risk allocation in concession agreement. would be expected to assume
the Private Partner), or specific (to the the project when passing laws However, the stabilisation
light rail or transport sector). developed market.
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.
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
SIN-#7991991-v10
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Market Comparison
On availability-based projects, during the adjustment regime.
concession term, the availability payment
component (where debt has been
hedged) and a variable component that
will include an escalation factor that
to increase the fares, but this ability may
often be restricted (as fare-raising is likely
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).
to increase the fares, but this ability may
often be restricted (as fare-raising is likely
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
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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
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.
technology used in light operate in accordance with best
rail sector. industry practice may also
Private partner to take on
Private Partner will also usually
have an obligation to co-operate/
interface with any new fare
collection system.
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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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.
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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(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.
SIN-#7991991-v10
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

 Completion (including delay and cost overrun) risk
 Maintenance risk
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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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Market Comparison
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.
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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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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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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Market Comparison
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
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
Expansion.
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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.
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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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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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
SIN-#7991991-v10
Government Support
Market Comparison
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,
SIN-#7991991-v10
Government Support
Market Comparison
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
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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Market Comparison
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
Private Partner will typically have to bear the location and other factors insurance, in particular arising on the project,
this risk. relevant to the project. where this has been although there are good
caused by in-country or grounds to say that it should
(e.g. force majeure termination) if it cannot uninsurable and if Contracting
reinstate the project on an economic Authority wishes for the
basis. Private Partner to continue
with the project.
Political risk The risk of Government Developed X Under an MSA, requisition will normally be A Permitted Delay may be None. The type of political risk
intervention, a force majeure event. granted to the Manufacturer events that occur in developed
discrimination, seizure where a stop order is imposed markets are likely more
or expropriation of the by a Contracting Authority e.g. in subdued and less drastic than
project. response to an accident. emerging markets. As such,
Public sector political risk insurance is not
budgeting. typically obtained.
discrimination, seizure the Private Partner’s control. Government departments keep termination event where cover themselves by use of
or expropriation of the This concept may include any “material in line with the project objectives the Contracting Authority political risk insurance, leaving
project. adverse Government action” (broadly and will need to actively manage will need to stand behind this risk to be managed by the
Public sector speaking any act or omission of any the various stakeholders in the debt and equity potentially insurer against the
budgeting. Government entity which has a material project to achieve this. with a Government Contracting Authority.
adverse impact on the Private Partner’s guarantee.
strikes, discriminatory changes in law as
etc.
Regulatory/chan The risk of law Developed X Network Rail is likely to seek change in None. None. Projects in the rail sector
ge in law risk changing and affecting law protection for specified events. involve a close interaction with
the ability of the project Similarly, a manufacturer will seek change passengers and safety
to perform and the price in law protection, and the parties will regulation plays a paramount
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at which compliance usually seek to agree a list of Foreseeable role. A change in health and
with law can be changes in law for which no protection is safety legislation may well be
maintained. available. of general effect but may have
Change in taxation. a disproportionate effect on
the rail sector. The parties are
expected to comply with
foreseeable changes in law.
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
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
cognisant of the risk allocation in agreement. would be expected to assume
the Private Partner), or specific (to the rail the project when passing laws However, the stabilisation
or transport sector). developed market.
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.
Inflation risk The risk that the costs Developed X This risk is taken by Network Rail in None, save for indexation. None. In developed markets, inflation
of the project increase relation to infrastructure. is typically minimal and does
more than expected. This risk is taken by the Manufacturer in not experience fluctuations to
relation to rolling stock, subject to a the extent of emerging
regime relating to Variations for markets.
Mandatory Modifications.
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Rolling stock maintenance costs are
usually subject to indexation.
based projects). inflationary costs through an Partner on demand risk developed markets and the
Rail ROT projects in emerging markets appropriate inflation uplift or tariff projects if the user cannot Private Partner’s expectation
are typically demand risk projects which adjustment regime. bear the cost increase. will be that this risk is borne
need the ability to increase the user tariff, and managed by the
but this ability may often be restricted (as Contracting Authority during
costs raising is likely to be a sensitive the concession term.
political issue), and so the Private Partner
may need additional Contracting Authority
support.
On availability-based projects the
availability payment will typically include
both a fixed component (where debt has
been hedged) and a variable component
(to reflect variable financing costs and
variable inputs such as staff and
materials).
Strategic risk Change in shareholding Developed X The importance of these risks varies from Varied. Varied. Varied.
of Private Partner. transaction to transaction. In a highly
Conflicts of interest regulated market like UK the participants
between shareholders are major corporates not SPVs so there is
of Private Partner. less of a focus on change in control.
Strategic risk Change in shareholding Emerging X Contracting Authority wants to ensure that Contracting Authority will limit Contracting Authority in
of Private Partner. the Private Partner to whom the project is Private Partner’s ability to emerging markets is not likely
Conflicts of interest and has the specialist input needed to change shareholding for a period to be more restrictive.
between shareholders make the project a success. (i.e. lock-in for initial concession
of Private Partner. Bid awarded on basis of Private Partner’s period).
technical expertise and financial resources Pre-tender proposal should set
therefore sponsors should remain out proposals for governance of
involved. Private Partner.
Disruptive The risk that a new Developed Not usually addressed as unlikely to be
technology risk emerging technology considered a ‘thread’ to the infrastructure.
unexpectedly displaces Technological change will mostly reduce
an established cost and increase efficiency.
technology used in
existing rail ROT
sector.
Disruptive The risk that a new Emerging X This risk is unlikely to be passed to the Obligation on Private Partner to Major changes would Typically not dealt with as
technology risk emerging technology Private Partner in an emerging markets provide service which seeks for require a variation. unlikely in emerging markets.
unexpectedly displaces ROT project where technology is unlikely continuous improvement for
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Market Comparison
an established to be a major component of the project. minor changes.
technology used in
existing rail ROT
sector.
Early The risk of a project Developed X In the UK heavy rail sector, the position is A key mitigant is to make sure In certain circumstances, Early termination
termination being terminated before less standardised than on typical PPP the termination triggers are not the Contracting Authority compensation is reasonably
(including any the expiry of time and projects. hair triggers and that there is may require a direct well defined and political risk
compensation) the monetary A Manufacturer may grant the Owner the scope, where possible, for each agreement in relation to a insurance is not typically.
risk consequences of such right, at its option to elect to take the party to remedy any alleged maintenance contract. It
termination. benefit of work carried out by the default. will invariably require a
Manufacturer prior to termination, at a fair direct agreement in
price reflecting instalments of the contract relation to any rolling
price already paid. Alternatively, the stock lease, preventing
Owner may usually require the the Owner from
Manufacturer to refund the contract price terminating without giving
paid, with interest. The Owner may seek the Contracting Authority
to negotiate a right to hand back the entire certain step in rights,
accepted fleet of rolling stock if the designed to enable the
number of rolling stock then accepted is Contracting Authority to
below a specified threshold. On a perform its statutory duty
termination, the Manufacturer will usually to provide railway
be required to indemnify the Owner and passenger services.
Operator against certain costs such as the
costs of procuring a replacement contract,
less or revenue as a result of owning a
smaller fleet and certain other direct
losses.
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 debt each party to remedy any Government to guarantee payment obligations.
termination. (to the extent applicable), equity and alleged default. the level of compensation Political risk insurance may be
a level of equity return; The mitigation for the lenders payable on termination. available and is likely to be
(2) Non-default termination – the Private where the level of compensation The lenders will require sought to cover the risk of the
Partner would get senior debt (to the is less than senior debt is the direct agreements with Contracting Authority or
extent applicable) and equity; and level of equity in the deal and the Contracting Authority Government guarantor
possibly sponsor guarantees , giving the lenders step-in defaulting on its payment
(3) Private Partner default – the Private such as completion guarantees rights in the case of the obligation.
Partner would typically get a to cover the key risk of default Contracting Authority
payment that is a function of the before a steady state service is calling a default
input cost of the project (construction established. termination or in the event
value / book value) or the of the Private Partner
outstanding senior debt (if being in default under the
appropriate). loan documentation. The
In many emerging markets it is common lenders would typically be
for the senior debt to be guaranteed as a given a grace period to
SIN-#7991991-v10
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Market Comparison
minimum in every termination scenario, gather information,
and for rights of set-off below that figure to manage the project
be restricted but this level of coverage is company and seek a
by no means universal and there are resolution or ultimately
projects where the Private Partner and its novate the project
lenders will retain the risk of a shortfall in documents to a suitable
asset valuation on an early termination. substitute concessionaire.
While it may seem that project lenders
termination rights.
SIN-#7991991-v10
Risk Matrix 5: Port (DBFO)

 A new container terminal port project, developed as a DBFO transaction
 Emerging market is based on a concession in Senegal
 Key risks
 Environmental and social risk
 Demand risk
 Force majeure risk
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Market Comparison
used for a project, the and acquire the required land interests for marine, environmental and legislative powers to markets are typically more
selection of that site the project. social 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
Planning permission. Partner. Whilst the Contracting Authority bidding process. Such Even where you have a registries and utility records.
may be able to secure the availability of assessment should consider any legally clear site,
Access rights. easements and covenants, etc.
the corridor, the suitability of the corridor Government enforcement
Security. may be dependent on the Private that may encumber the land powers may be needed
Heritage. Partner’s design and construction plan. The Contracting Authority to properly secure the
The Contracting Authority would generally should, to the greatest extent site for the private sector.
Archaeological.
be responsible for providing a “clean” site, possible, ensure that it has a There may be historic
Pollution. complete understanding of the encroachment issues
with no restrictive land title issues, and
Latent defects. existing utilities and contamination. risks involved in securing the that the Private Partner
Existing assets proposed to be used in the site and the site constraints that cannot be expected to
project should also be fully surveyed and will impact on the construction deal with.
warranted. and operation of the system. Examples include the
The Contracting Authority will normally The Contracting Authority should need to manage the
hand over the site to the Private Partner in also manage any indigenous relocation of people (e.g.
an “as-is” condition. The Private Partner land rights issues that may the removal of informal
may take the risk for dealing with adverse impact on the use of the site. housing or businesses)
conditions revealed by surveys regarding Prior to awarding the tender the and continued efforts to
unforeseeable subsoil risks. Contracting Authority could manage the social and
(through legislation and a proper political impact of the
Where it is not possible to fully survey project on and around
prior to award risk will be allocated to consultation process) limit the
ability for potential land right the site.
Contracting Authority or shared.
owners or neighbouring The Contracting Authority
properties and trades to raise may be required to
claims on the land and/or for provide additional site
injurious affection. security / assistance
manage this risk.
SIN-#7991991-v10
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Market Comparison
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 reliable
used for a project, the and acquire the required land interests for marine, environmental and legislative powers to utilities records, and land
selection of that site the project. social assessments and should secure the site (e.g. charges) in emerging markets
and the geophysical The Contracting Authority would generally disclose such information to the through expropriation / may be less certain than in
conditions of that site. be responsible for providing a “clean” site, Private Partner as part of the compulsory acquisition). developed markets where
Planning permission. with no restrictive land title issues, and bidding process. Even where you have a established land registries and
existing utilities and contamination either The Contracting Authority legally clear site, utility records exist.
Access rights.
dealt with or fully surveyed and warranted. should, to the greatest extent Government enforcement In the absence of legislation in
Security. Existing assets proposed to be used in the possible, ensure that it has a powers may be needed emerging markets, indigenous
Heritage. project should also be fully surveyed and complete understanding of the to properly secure the land rights issues and
warranted. The Private Partner may take risks involved in securing the site for the private sector. community engagement can
Archaeological.
some risk for dealing with adverse site and the site constraints that There may be historic be managed by the
Pollution. conditions revealed by surveys but other will impact on the construction encroachment issues Contracting Authority through
Latent defects. unforeseeable ground risks (e.g. and operation of the system. that the Private Partner the adoption of IFC
archaeological risks) are likely to need to The Contracting Authority should cannot be expected to Safeguards for the project,
Channel dredging. be held by the Contracting Authority. deal with. particularly in order to ensure
also manage any indigenous
On brownfield port projects the land rights issues that may Examples include the international financing options
Contracting Authority may take the risk in impact on the use of the site. need to manage the are available to the project.
all or part of the existing port infrastructure Prior to awarding the tender the relocation of people (e.g.
handed over to the Private Partner prior to Contracting Authority could the removal of informal
commencement of any expansion to (through legislation and a proper housing or businesses)
ensure a certain minimum standard is consultation process) limit the and continued efforts to
achieved. ability for potential land right manage the social and
Over the term of the concession the owners or neighbouring political impact of the
Contracting Authority may be required to properties to raise claims on the project on and around
continue to provide supporting land. the site.
infrastructure work such as ensuring that The Contracting Authority
the channels are dredged and maintained may be required to
at the required depth and that connecting provide additional site
roads, railways and utilities continue to be security / assistance
provided. during operations to
manage this risk.
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.
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Market Comparison
Contracting Authority. Lenders will expect to see a plan
Social risks, insofar as they may involve to see how these aspects are
indigenous groups, will be the dealt with and that these comply
responsibility of the Contracting Authority. with the Equator Principles (if
applicable to the project).
The Contracting Authority may also need
to retain responsibility for social impacts Certain investors, such as DFIs,
which are unavoidable from the will have their own requirements
development of the project (e.g. for environmental and social
compensation for expropriation of plans. In particular in relation to
indigenous land rights and/or relocation of noise pollution and will require
urban communities / businesses). that these are provisions in
agreements that will lead to
remediation or mitigation.
Environmental risk extends to
the impact of the wider project
including issues such as the
location in which dredging spoil
is to be dumped and the wider
impact of the project on marine
life and wildlife. Projects in the
United Kingdom and Australia
have faced substantial
opposition and costs in
addressing and mitigating these
risks.
Environmental The risk of the existing Emerging X The Private Partner will have primary The Contracting Authority should Government will need to International lenders and
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 catered for 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 to see how these aspects private and public sector level
which are unavoidable from the the Private Partner, to ensure are dealt with. and this scrutiny is helpful to
development of the project (e.g. that such plans will be adequate mitigate the risks posed by
compensation for expropriation of to appropriately manage the these issues.
indigenous land rights and/or relocation of risks of the project. In particular on emerging
rural or urban communities / businesses). Lenders will expect to see a plan market port projects the impact
to see how these aspects are on local subsistence fishing
dealt with and that these comply communities will need to be
with the Equator Principles (if managed by the Contracting
applicable to the project). Authority.
Certain investors, such as DFIs,

will have their own requirements
for environmental and social
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Market Comparison
plans. In particular in relation to
noise pollution and will require
that these are provisions in
agreements that will lead to
remediation or mitigation.
Environmental risk extends to
the impact of the wider project
including issues such as the
location in which dredging spoil
is to be dumped and the wider
impact of the project on marine
life and wildlife. Projects in the
United Kingdom and Australia
have faced substantial
opposition and costs in
addressing and mitigating these
risks.
Design risk The risk that the project Developed X The Private Partner will have principal The Contracting Authority will Developed market port
has not been designed responsibility for adequacy of the design often broadly draft the Private projects benefit from stable
adequately for the of the system and its compliance with the Partner’s design and resource availability and
purpose required. output / performance specification. construction obligations to defined design standards
Feasibility study. The Contracting Authority may retain satisfy the output specifications which allow for increased
some design risk in certain aspects of the and ensure compliance with innovation and productivity
Approval of designs. applicable legal requirements gains. The quality of the
Changes to design. how prescriptive the Contracting Authority and good industry practice information provided by the
is in the output specification. standards. This allows for Contracting Authority and
private sector innovation and limited ability to verify such
If the output specification is too efficiency gains in the design. data can also hinder the
prescriptive the Private Partner’s ability to Private Partner’s ability to
warrant the fitness for purpose of its A design review process will
allow for increased dialogue and unconditionally take full design
design solution may be impacted, and the risk.
Contracting Authority will to that extent cooperation between the
share in the design risk. Contracting Authority and the
Private Partner, however the
If the project is being integrated into mutual review process should
existing infrastructure, the Private not be construed as a reduction
Partner’s ability to warrant the fitness for or limitation of the Private
purpose of its design solution may be Partner’s overall liability.
impacted (in that it will not be able to
warrant defects in the existing
infrastructure that may impact
performance).
Design risk The risk that the project Emerging X The Private Partner will have principal Since the Private Partner is Where the projects are
has not been designed responsibility for adequacy of the design usually taking the majority of the proposed by Private Partners
adequately for the of the port infrastructure. economic risk on the project, the on an unsolicited basis there is
purpose required. Private Partner would wish to likely to be little input from the
Feasibility study. limit the rights of the Contracting Contracting Authority in the
Authority to object to the design of the project.
proposed design or any changes
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Market Comparison
Approval of designs. to it when these would materially However where there is
Changes to design. change the long-term interests existing port infrastructure,
of the Contracting Authority competing ports in the same
when the infrastructure is country or where the port is
returned. being procured for a particular
industry (eg oil and gas
terminals) the Contracting
Authority may have more
interest in defining the output
specification.
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 of
Commissioning work/related infrastructure work being contractual risk allocation, as the construction, testing and obligations to credible and
damage. completed in which case risk could be financing cost / lost revenue commissioning process experienced subcontractors
shared. impact is typically very high in terms of ensuring that and by appropriate timetable
IP right compared to the individual any rights that it has to and budget contingency.
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
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.
Construction Labour dispute. Emerging X The Private Partner assumes project It may be difficult for the Private The Contracting Authority In an emerging market context
risk Interface/project management risk unless certain work is Partner to mitigate these may have a critical role to the dynamics may be different
management. dependent on Contracting Authority integration risks solely through play at stages of the if the lenders have a significant
work/related infrastructure work being contractual risk allocation, as the construction, testing and
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Market Comparison
Commissioning completed in which case risk could be financing cost / lost revenue commissioning process underwrite of their senior debt.
damage. shared (see comments on supporting impact is typically very high in terms of ensuring that Late completion is most often
IP right infrastructure obligations). compared to the individual any rights that it has to addressed as lost opportunity
breach/infringement. The Private Partner takes labour dispute component parts of the project comment on design for revenue by the Private
risk unless such labour disputes are that can affect this. Ensuring development and testing Partner.
Quality assurance that the programme for results does not
standards. political in nature or, in some jurisdictions, There will also be a longstop
nationwide. completion of the works has adversely delay the
Defects. sufficient float periods for all project. date for completion.
The Private Partner also takes critical stages and that parties
Subcontractor Subcontractor insolvency risk or the risk of Similarly the Contracting
are incentivised to work together Authority may need to
disputes/insolvency. a dispute with its Subcontractor causing to achieve the common take responsibility for
Cost overruns where delay. deadlines may be more effective delays caused by failure
no compensation / The Private Partner takes the risk of IP strategies. of public bodies to issue
relief event applies. right infringement. necessary consents in
standards (including the ISPS Code) and
may be required to comply with or develop
other quality assurance programmes or
standards.
(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 be
overrun) risk budget and the the engagement of a suitable EPC the Private Partner begins construction, testing and easier as the Private Partner
consequences of contractor. receiving payment for its design commissioning process will typically have more
missing either of those The principal risk arising out of delay will and construction services once in terms of ensuring that experience and reliable
two criteria. be the loss of expected revenue, the significant components of the any 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
ensure critical components are events or force majeure
preventative and lifecycle maintenance to completed on time. Financial
ensure a reliable and punctual service for events where delays or
penalties and liquidated
SIN-#7991991-v10
Government Support
Market Comparison
an efficient price. This may be managed damages can help enforce cost overruns have
through a single EPC joint venture or by construction deadlines. arisen from either the
the Private Partner managing a series of The combination of (i) incentives fault of the Contracting
works, supply and or penalties for timely Authority, or no-fault
operation/commissioning contracts. completion and (ii) the events.
The Private Partner will be expected to implementation of a “longstop Similarly the Contracting
demonstrate adequate system date” (a date which is pegged to Authority may need to
performance before it is given permission a prescribed time period after take responsibility for
to operate the system. the scheduled completion date) delays caused by the
will create the necessary tension failure of public bodies to
to incentivize timely completion issue necessary
while allowing the Private consents in good time.
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.
Completion The risk of Emerging X The Private Partner will bear principal It may be difficult for the Private The Contracting Authority An additional concern for the
(including delay commissioning the responsibility for delay and cost overrun Partner to mitigate these may have a critical role to Private Partner to manage in
and cost asset on time and on risk, and will typically manage this through integration risks solely through play at stages of the the context of delays will be
overrun) risk budget and the the engagement of a suitable EPC contractual risk allocation, as the construction, testing and whether the Private Partner
consequences of contractor. financing cost / lost revenue commissioning process will breach any minimum
missing either of those The principal risk arising out of delay will impact is typically very high in terms of ensuring that throughput guarantee owed to
two criteria. be the loss of expected revenue, the compared to the individual any rights that it has to the Contracting Authority (see
ongoing costs of financing construction component parts of the project comment on design performance risk section).
and extended site costs. that can affect this. Ensuring development and testing
that the programme has results does not
A key integration risk on port projects is sufficient float periods for all adversely delay the
the procurement and installation of cranes critical stages and that parties project.
and other goods handling machinery. are incentivised to work together
These may be provided by an operator or Similarly the Contracting
to achieve the common Authority may need to
through long term leasing arrangements deadlines may be more effective
and may sit outside the EPC contractor’s take responsibility for
strategies. delays caused by failure
scope.
of public bodies to issue
necessary consents in
good time.
Performance/ The risk that the asset Developed X The Private Partner bears the risk of Where certain In developed markets, the
price risk is able to achieve the meeting the performance specification. performance indicators Contracting Authority should
output specification However, the Contracting Authority is cannot be met due to have access to various data
metrics and the price or responsible for enforcing the regime and actions by the sources to develop realistic
SIN-#7991991-v10
Government Support
Market Comparison
cost of doing so. for ensuring that the output specifications Contracting Authority or and attainable performance
Damage pollution are properly tailored to what the Private unforeseen specifications and models.
accidents. Partner can deliver. Consideration needs circumstances, the
to be given to the ability of the Private Private Partner may be
Meeting handback Partner to achieve the necessary eligible to seek relief or
requirements performance levels, and the compensation.
Health and safety appropriateness of metrics given the
vandalism. nature of the project.
Equipment becoming
Expansion.
Supporting
infrastructure.
Marine services.
Throughput
guarantees.
Performance/ The risk that the asset Emerging X The Private Partner bears the risk of The Private Partner may be able Where certain In emerging markets the
price risk is able to achieve the meeting the performance specification to enter into service level performance indicators Contracting Authority’s ability
output specification and any throughput guarantees it agreements with the relevant cannot be met due to to provide the appropriate
metrics and the price or provides. Government entities which will actions by the infrastructure support
cost of doing so. The Contracting Authority bears the risk of be providing the required Contracting Authority or upgrades presents a particular
Damage pollution enforcing the regime and for ensuring that Governmental services at the unforeseen challenge.
accidents. the output specification is properly tailored port. circumstances, the
to what the Private Partner can deliver. Private Partner may be In addition where there the
Meeting handback eligible to seek relief or
requirements Consideration needs to be given to the A failure by the relevant project is in competition with
Government entity to comply compensation. an existing port operated by
Health and Safety ability of the Private Partner to achieve the
necessary performance levels given the with these service level The Contracting Authority the port authority there may be
Vandalism. agreements should entitle the may be required to issues in the level of service
nature of the project and the emerging
Equipment becoming market in which it will be based. In Private Partner to relief under upgrade the road or rail provided to the project by the
prematurely obsolete. particular Private Partners typically want the port concession. network servicing the port authority which would
freedom in how they operate the port. port. need to be addressed in the
Expansion.
project documents.
Supporting In emerging markets the surrounding The Contracting Authority may
infrastructure. hinterland infrastructure (road and rail also set key performance
networks) required to support the project indicators (eg in relation to the
Marine Services.
is of particular importance to the Private gross number of crane
Throughput Partner and will be a retained Contracting movements per hour or set
guarantees. Authority risk to the extent that it impacts conservation periods for full,
on the successful implementation of the empty or transhipment
project. containers) in relation to the
A failure by the Contracting Authority to operation of the port.
upgrade and maintain the supporting
infrastructure in a manner which enables it
to deal with any increased traffic from the
port will impact on the Private Partner’s
ability to process throughput at the port
SIN-#7991991-v10
Government Support
Market Comparison
and will adversely affect berthing times
and the efficiency of the project.
Likewise the inability of the Contracting
Authority to provide or procure the
provision of the required marine services
(pilotage, towage, port traffic control)
which form the exclusive domain of the
port authority will impact on the Private
Partner’s ability to perform.
Finally the Contracting Authority is
required to ensure the efficient provision
of the necessary customs control,
immigration control and quarantine
(human and animal) functions at the port.
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 a
cost increases. necessary. cost increases due to 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 accounted
efficiencies in energy Partner. for.
consumption throughout the
concession period.
Resource or The risk that the supply Emerging X The Private Partner bears the principal The Contracting Authority Emerging markets are
input risk of inputs or resources responsibility to ensure an uninterrupted may need to stand generally more susceptible to
required for the supply of inputs/resources for the project behind the cost risk for market volatility and major cost
operation of the project and to manage the costs of those inputs. certain inputs, or at least variations.
is interrupted or the There may be specific instances where underwrite the Private
cost increases. the Private Partner may need the share Partner’s financing for
this risk with the Contracting Authority, these costs.
such as availability of energy supply, or
Time and cost risks are normally passed
on to contractors.
Demand risk The availability by both Developed X

volume and quality
along with
transportation of
SIN-#7991991-v10
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Market Comparison
resource or inputs to a
project or the demand
for the product of
service of a project by
consumers/users
Demand risk The availability by both Emerging X In emerging markets the Private Partner The Contracting Authority’s Competition from In particularly robust emerging
volume and quality typically takes the full demand risk on port inefficient provision of marine competing port facilities market projects the Private
along with projects. services, insufficient maritime in-country (whether new Partner may need to provide a
transportation of On certain robust projects the Private infrastructure maintenance or or existing) is a major minimum throughput
resource or inputs to a Partner may also need to give minimum insufficient channel dredging risk. guarantee subject to
project or the demand throughput guarantees in relation to the may impact on the port users’ See guarantees referred compliance by the Contracting
for the product of number of TEUs processed per month. demand for the project. under “mitigation”. Authority with its maintenance
service of a project by Accordingly it is common for and supporting infrastructure
consumers/users Contracting Authorities to be obligations.
required to guarantee certain
levels of protection against
competing ports (within a
particular distance or time
envelope) and to guarantee the
punctual and adequate provision
of certain supporting services.
Maintenance The risk of maintaining Developed X The Private Partner will have principal The Contracting Authority should In developed markets, the
risk the asset to the responsibility for meeting the appropriate take time to ensure that the involvement of the Private
appropriate standards standards regarding maintenance as set output specification properly Partner in the operation,
and specifications for out in the output specifications defined by defines the maintenance maintenance and rehabilitation
the life of the project. the Contracting Authority. obligations on the Private of the project provides several
Increased maintenance The Private Partner generally assumes Partner to ensure that the benefits by incentivizing
costs due to increased the overall risk of periodic and system remains robust in the greater care and diligence by
volumes. preventative maintenance, emergency event of early termination or the Private Partner in the
maintenance work, work stemming from expiry of the agreement. There construction phase, and
Incorrect estimates and will be requirements that will increasing the useful life of the
cost overruns. design or construction errors,
rehabilitation work, and in certain project need to be met by the Private infrastructure.
model instances, work stemming from Partner on hand back and a
implementing technological or structural reserve account or bonding may
changes. be required to be provided by
the Private Partner as security
The Contracting Authority may retain the for its obligations.
responsibility of performing certain soft
services (e.g. cleaning, security, minor The primary role of the
management services, etc.) where Contracting Authority is to
economical. properly define the output
specifications and level of
services required of the Private
Partner.
SIN-#7991991-v10
Government Support
Market Comparison
quality and service failures. The
Contracting Authority will be
Maintenance The risk of maintaining Emerging X The Private Partner will have principal The Contracting Authority should The Contracting Authority In emerging market port
risk the asset to the responsibility for maintaining the port take time to ensure that the may be required to projects there is typically a
appropriate standards infrastructure to the appropriate standards output specification properly guarantee and greater focus on the
and specifications for set out in the output specification defined defines the handback obligations proactively manage the obligations of the Contracting
the life of the project. by the Contracting Authority. on the Private Partner to ensure maintenance of the Authority in relation to the
Increased maintenance Where there is integration of the system that the port infrastructure existing maritime upgrade and continued
costs due to increased into existing infrastructure, the Contracting remains robust in the event of infrastructure that maintenance of the supporting
volumes. Authority may need to retain the early termination or expiry of the integrates with the hinterland infrastructure as
maintenance or latent defect risk of some agreement. project. well as on the port authority’s
Incorrect estimates and ability to provide the marine
cost overruns. of the existing assets and fit for purpose Failure to get the output
standards appropriately adjusted. specification right for the project services and maintain the
Maintenance of effectively transfers the related maritime infrastructure.
surrounding non-project The Contracting Authority however will
often be responsible for maintaining the maintenance risk back to the Failure by the Contracting
maritime infrastructure. Contracting Authority. Authority to do so will impact
access channels (including maintenance
Maintenance dredging. dredging), turning circle and docking The Contracting Authority should on the efficiency of the port
zones. ensure that the port authority is (especially in relation to vessel
capable of fulfilling its berth and cargo dwell times)
The Contracting Authority will also usually and will ultimately impact on
be responsible for maintaining the related maintenance obligations (ie by
ensuring it has adequate funds the Private Partner’s ability to
equipment used in the provision of marine effectively implement the
services (and procuring replacement or and capacity to do so).
project.
additional equipment where required).
In emerging markets inefficient
port operation impacts the
competitiveness of the project
and is a major concern for
Private Partners.
Improving efficiency can lower
total transaction costs and will
boost the competitiveness of a
project.
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, after a Partner, only for its
prohibit performance. enemies; (ii) nuclear or radioactive The risk of disruption as a result number of months of outstanding debt (but not for its
contamination; (iii) chemical or biological of no-fault events could be continuous force majeure expected rate of return) for
contamination; (iv) pressure waves mitigated by relaxing the either party should be termination arising from a
SIN-#7991991-v10
Government Support
Market Comparison
caused by devices traveling at supersonic performance thresholds (e.g. entitled to terminate the “natural” force majeure.
speeds; or (v) discovery of any species-at- requiring a lower level of concession contract. If
risk, fossils, or historic or archaeological acceptable service, which then the Contracting Authority
artefacts that require the project to be allows the Private Partner to does not want the
abandoned. take the risk of a certain number concession contract to be
Force majeure events occurring during of day-to-day adverse events terminated then the
construction will also cause a delay in typical to a project of this nature Contracting Authority
revenue commencement. The ability of but without incurring shall pay the Private
the Private Partner to bear this risk for performance penalties). Partner the actual
uninsured risks will be limited, and the If the effect of the force majeure additional cost of
Contracting Authority will typically have to event is to reduce the revenues continued operating and
bear the risk after a certain period of time of the Private Partner then the an amount of
or level of cost has been exceeded. amount of the variable compensation in order to
concession fee should be service the Private
During operation, the impact of the force Partner’s debt obligations
majeure may require relief from KPI rateably reduced. However, it
will be a matter of negotiation as during the course of the
penalties or an element of temporary event.
reduction or suspension of concession fee to whether any fixed concession
payments may be required. fee should continue to be Whether the debt can be
payable in full. fully serviced in such a
scenario prior to the
possible time for
termination, will be a key
area of focus for
prospective lenders as
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.
Force majeure The risk that Emerging X Force majeure is a shared risk and you Project insurance (physical Termination payment for In emerging markets, some
risk unexpected events would expect to see a fairly well damage and loss of revenue prolonged force majeure projects do not provide any
occur that are beyond developed list of events that entitle the coverage) is the key mitigant for may differ depending on protection for natural force
the control of the Private Partner to relief. force majeure risks that cause the type of force majeure. majeure events, even if
parties and delay or Typical events could include: physical damage. Lenders will expect to insured leaving lenders
prohibit performance. see debt covered by exposed to termination.
- natural force majeure events, which Contracting Authority
typically can be insured (eg fire / flooding / and/or insurance
storm etc), and payments.
- force majeure events which typically
cannot be insured (eg strikes / protest /
epidemics)
SIN-#7991991-v10
Government Support
Market Comparison
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
circumstances the provide support.
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 revenue may be In emerging market port
interest rate risk fluctuations and or the this risk through hedging arrangements managed by passing the risk collected in local projects, the devaluation of
interest rate over the under the Finance Documents, to the through to the port users by way currency the Contracting local currency beyond a
life of a project extent possible in that market. of adjustments to the tariff, but Authority may need to certain threshold may be a
In certain countries this may not be the ability to do this may be retain the risk of trigger for non-default
possible due to exchange / interest rate limited. devaluation of the local termination. Alternatively it
volatility. It is therefore common for the currency to the extent could trigger a “cap and collar”
Private Partner to look for the that such devaluation subsidy arrangement from the
right to charge the port tariffs in impacts on the economic Contracting Authority. Issues
USD or other hard currency viability of the project of convertibility of currency and
rather than local currency. (due to the need to pay restrictions on repatriation of
for foreign currency funds are also bankability
imports and service issues upon termination in
foreign currency debt) or emerging markets.
alternatively provide the
necessary dispensations/
approvals to allow tariffs
and project accounts to
be denominated in hard
currency.
Contracting Authority may choose to circumstances or an act significantly, the risk is typically
assume responsibility for the uninsurable or threat of terrorism. shared by either having an
risk, while requiring the Private Partner to agreed cost escalation
regularly approach the insurance market mechanism up to ceiling or a
SIN-#7991991-v10
Government Support
Market Comparison
to obtain any relevant insurance. percentage sharing
If the cost of insurance increases above arrangement - this allows the
specified amounts this increased cost may Contracting Authority to
be shared by the parties. quantify the contingency that
has been priced for this risk.
project (e.g. physical damage cover for In circumstances where the
major project components) and the parties required insurance becomes
are unable to agree on suitable unavailable, the Contracting
arrangements then the Private Partner Authority is typically given the
may need an exit route (e.g. termination of option to either terminate the
the project on the same terms as if it were project or to proceed with the
an event of force majeure) if it cannot project and effectively self-
reinstate the project on an economic insure and pay out in the event
basis. the risk occurs.
Private Partner will typically have to bear become unavailable for it given insurance, in particular arising on the project, although
this risk. the location and other factors where this has been there are good grounds to say
relevant to the project. caused by in-country or that it should do so if the
If the uninsured risk is fundamental to the regional events or Private Partner has no
project (e.g. physical damage cover for circumstances. protection for the
(e.g. force majeure termination) if it cannot uninsurable.
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 events
intervention, responsibility for political events outside outline certain political events as typically lead to a that occur in developed
or expropriation of the Contracting Authority will be responsible events excusing causes (relief the Contracting Authority subdued and less drastic than
project. should it fail to continually provide the from payment deductions) that will need to stand behind emerging markets. As such,
Public sector Private Partner with the license and involve a breach of obligations debt and equity. political risk insurance is not
budgeting. access to the system and surrounding or interference by the typically obtained.
lands necessary to allow the Private Contracting Authority with the
Partner to fulfil its obligations. project.
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 Contracting
budgeting. This concept may include any “material project to achieve this. potentially with a Authority.
adverse Government action” (broadly Government guarantee.
SIN-#7991991-v10
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Market Comparison
strikes, discriminatory changes in law, as
etc.
Regulatory/cha The risk of law Developed X The risk of change in law sits mostly with Change in law risk that is
nge in law risk changing and affecting the Contracting Authority but there will be retained by the Private Partner
the ability of the project a degree of risk sharing in the following may be mitigated by indexation
to perform and the manner: provisions (on the basis that
price at which The Private Partner will be kept whole in general changes in law will
compliance with law respect of changes in law which are: (i) affect the market equally and
can be maintained. Discriminatory (to the project or the should be reflected in general
Change in taxation. Private Partner) (ii) Specific (to the port inflation).
sector or to PPP projects in the Change in law risk may also be
jurisdiction) or (iii) general change in law mitigated where there is an
affecting capital expenditures. A change ability to pass back changes in
in law is often subject to a de minimis the tariff charged on the project.
threshold before the Private Partner is Some projects only permit the
entitled to compensation Private Partner to claim relief for
The Private Partner will not be general changes in law
compensated for general changes in law occurring after completion of
that only affect operational expenditure or construction. This approach may
taxation (i.e. affect the market equally). be justified if the country's legal
Changes in law will always entitle the regime ensures that the
Private Partner to a Variation where this is prevailing legal regime at the
necessary to avoid an impossible start of construction is fixed until
obligation. If this cannot be achieved the the works are complete (i.e.
Private Partner will typically be entitled to does not operate retrospectively
terminate as if a Contracting Authority to projects in progress).
breach had occurred.
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 have
the ability of the project post-bid / post-contract signature. Government departments keep clause that entrenches a greater level of protection
to perform and the There may be a degree of risk sharing the project in mind when passing certain legal positions from changes in law to reflect
price at which with the Private Partner and there may be new laws to ensure that the (such as the current tax the greater risk of change
compliance with law Private Partner is not regime) against any (including both likelihood and
SIN-#7991991-v10
Government Support
Market Comparison
can be maintained. certain risks that the Private Partner is inadvertently affected. future changes in law. consequences) and in order to
Change in taxation. expected to bear alongside the remainder The various Government This may require a level attract investors to the project.
of the market. departments that may impact on of parliamentary In that way, the Contracting
The Private Partner would look to be kept the project should therefore be ratification of the Authority would be expected to
whole in respect of changes of law which cognisant of the risk allocation in concession agreement. assume more change in law
have a material adverse effect on the the project when passing laws However, the risk than compared to a project
economic equilibrium of the concession. and regulations that may have stabilisation method is in a developed market.
Where the parties are unable to agree an impact on it. generally not favoured by
how to reasonably take into account the Governments or NGOs
effects of the change in law so as to re- (e.g. because of the
establish the economic equilibrium the concept of Private
Private Partner will have a right to Partner immunity from
terminate (typically on a Contracting updates to environmental
Authority default basis). laws, for example).
Inflation risk The risk that the costs Developed X Inflation risks during construction are In developed markets, inflation
of the project increase typically borne by the Private Partner, is typically minimal and does
more than expected. while inflation risks during the concession not experience fluctuations to
term will typically be primarily borne by the the extent of emerging
Contracting Authority. markets.
Inflation risk The risk that the costs Emerging X Inflation risk is typically borne by the This risk may be mitigated to Support may be needed If tariff increases are subject to
of the project increase Private Partner and transferred to the port some extent where the Private eg to ensure tariffs can regulation, then this creates
more than expected. users. Partner has the right to collect be levied in foreign uncertainty. The Private
The Private Partner retains the risk of the the tariffs in hard currency, currency and/or to Partner may be able to get the
impact on demand caused by any which more closely matches ensure swift and reliable Contracting Authority to stand
increases in the tariffs. project expenditure / financing. convertibility of local behind any shortfalls in tariff
currency, as well as increases which the Private
The Private Partner will accordingly need expatriation of project Partner anticipates making (eg
the ability to increase the port tariffs, but revenues. to ensure that USD inflation
this ability may often be subject to was covered as a minimum).
regulation (as tariff-raising is likely to be a
sensitive political issue), and so the
Private Partner may need additional
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
met.
SIN-#7991991-v10
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Market Comparison
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 and in some cases for up to the
should remain involved in the project. first 15 years of operations).
In particular any incoming
shareholder will need to have
the requisite financial capacity
and technical expertise to be a
sponsor in a port operating
company.
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 detail
technology risk emerging technology Private Partner as technology is unlikely to provide service which seeks require a variation. in developed markets.
port sector. industry practice may also
Private Partner to take on
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 detail
technology risk emerging technology Private Partner as technology is unlikely to provide service which seeks require a variation. in emerging markets.
port sector. industry practice may also
Private Partner to take on
SIN-#7991991-v10
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Market Comparison
termination junior debt, equity and a level of equity alleged default. rights in the case of the Authority defaulting on its
(2) Non-default termination – the Private calling a default
Partner would get senior debt and equity termination or in the
return; and event of the Private
Partner being in default
(3) Private Partner default – (a) Where the under the loan
project cannot be retendered (due to documentation. The
political sensitivity or a lack of interested lenders would typically
parties) the Private Partner would typically be given a grace period
be entitled to an amount equal to the to gather information,
adjusted estimated fair value of future manage the project
payments, less the costs of providing the company and seek a
services under the project/concession resolution or ultimately
agreement. (b) Where the project can be novate the project
retendered, the Private Partner would be documents to a suitable
entitled to the amount that a new private substitute
partner would pay for the remaining term concessionaire.
therefore are not significantly exposed to
a project default, they would not typically
termination rights.
termination being terminated before early termination will depend on the the termination triggers are not Contracting Authority may also be sovereign
(including any the expiry of time and reasons for termination and typically for: hair triggers and that there are may require a guarantee guarantees which support the
compensation) the monetary (1) Contracting Authority default – the adequate well-defined routes for from a higher level of Contracting Authorities
risk consequences of such Private Partner would get senior each party to remedy any Government to payment obligations.
termination debt, equity and a level of equity alleged default. guarantee the level of Political risk insurance may be
return; compensation payable available and is likely to be
on termination. sought to cover the risk of the
(2) Non-default termination – the Private
Partner would get senior debt and The lenders will require Contracting Authority or
equity; and direct agreements with Government guarantor
the Contracting Authority defaulting on its payment
(3) Private Partner default – the Private giving the lenders step-in obligation.
Partner would typically get a rights in the case of the
payment that is a function of the
SIN-#7991991-v10
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Market Comparison
input cost of the project (construction Contracting Authority
value / book value) or the calling a default
outstanding senior debt (in some termination or in the
cases there may even be a return of event of the Private
unamortised equity / subordinated Partner being in default
debt). under the loan
In many emerging markets it is common documentation. The
for the senior debt to be guaranteed as a lenders would typically
minimum in every termination scenario, be given a grace period
and for rights of set-off below that figure to to gather information,
be restricted. While it may seem that manage the project
project lenders therefore are not company and seek a
significantly exposed to a project default, resolution or ultimately
they would not typically have the right to novate the project
call for a termination in these documents to a suitable
circumstances, and so they are still substitute
motivated to make the project work to concessionaire.
termination rights.
SIN-#7991991-v10
Energy Sector
Energy Sector
Risk Matrix 6: Solar PV (BOO)

 The emerging market project is based primarily on solar PV projects built on a BOO basis:
 Assumes the electricity produced from the solar PV project is sold to a state owned single buyer
 Project scope may include associated infrastructure, such as electricity transmission infrastructure which is then handed over to the state owned off taker
 Assumes the PV project will connect to the existing transmission lines and electric system which the Contracting Authority owns (will own to the extent the project
company has been asked to build transmission infrastructure)
 The developed market is based primarily on solar PV projects built on a BOO basis:
 Enhanced single buyer scheme whereby power generated from a project will be sold to a state enterprise off taker
 Assumes a private sector identifies the site on which the project will be built
 Key risks
 Resource or input risks
 Performance/price risk
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Land purchase The risk of acquiring Developed X The Private Partner bears full The Private Partner should, to Generally, neither the Land rights and ground
and site risk title to the land to be responsibility for the suitability of the the greatest extent possible, Government authority nor conditions in developed
used for a project, the project site, including geological, ensure that it has a complete the contracting authority markets are typically more
selection of that site geotechnical, archaeological conditions. understanding of the risks has an obligation to established and risks can be
and the geophysical The Private Partner is obliged to obtain involved in securing the site and facilitate the issuance of mitigated with appropriate due
conditions of that site. and maintain the peaceful use and the site constraints that will the required permits or diligence with relevant land
Planning permission. possession of the project site, as well as impact on the construction and consents, nor does it registries and utility records.
all requisite access rights and servitudes operation of the facility. have any obligations in The Private Partner’s
Access rights. relation to assisting with
that might be required. The Private Partner may seek to obligations with regards to
Security. pass the site risk down to the securing the site. indigenous rights are
The Private Partner bears full
Heritage. responsibility to procure the construction, EPC contractor and in terms of The exemption will be generally well legislated in
operation and maintenance of the facility the lease agreement (if where the project requires developed markets. For
Archaeological.
in accordance with all laws and consents applicable), to the extent new transmission lines to example, the requirement to
Pollution. possible. be constructed; enter into indigenous land use
and accordingly, bears full responsibility
Latent defects. for obtaining all environmental permits, The Private Partner must ensure construction of agreements under native title
consents and licenses. that the construction and/or transmission lines will be legislation in Australia and the
operating contractor complies done by the contract equivalent under first nations
with any applicable permits and authority, but at the costs law in Canada.
consents by way of the inclusion of the Private Partner. In On the other hand the rights of
of corresponding obligations in such case, the contracting private landowners against
the construction contracts. authority will be forced sales or expropriation
responsible for securing might be stronger in
the right of ways required developed markets, requiring
for construction of the more time to acquire the land
transmission lines. and all necessary rights for
the development of the project
such as easements for the
connection corridor.
Land purchase The risk of acquiring Emerging X The Private Partner bears fully The Private Partner should Neither the Government Land rights and ground
and site risk title to the land to be responsibility for the suitability of the undertake detailed ground, Authority nor the conditions (in particular
used for a project, the project site, including geological, geotechnical, environmental and Contracting Authority has reliable utilities records, and
selection of that site geotechnical, archaeological conditions. social assessments/surveys and an obligation to facilitate land charges) in emerging
and the geophysical The Private Partner is obliged to obtain should disclose such information the issuance of the markets may be less certain
conditions of that site. and maintain the peaceful use and to the Government Authority as required permits or than in developed markets
Planning permission. possession of the project site, as well as part of the bidding process. consents, nor does it where established land
all requisite access rights and servitudes The Private Partner should, to have any obligations in registries and utility records
Access rights. relation to assisting with exist.
that might be required. the greatest extent possible,
Security. ensure that it has a complete securing the site. In the absence of legislation in
The Government Authority has the right of
Heritage. access to the project site to verify understanding of the risks emerging markets, indigenous
compliance by the Private Partner with its involved in securing the site and land rights issues and
Archaeological.
obligations under the relevant the site constraints that will community engagement can
Pollution. impact on the construction and be managed by the
Government agreements.
Latent defects. operation of the facility. Contracting Authority through
The Private Partner bears full the adoption of IFC
responsibility to procure the construction, The Private Partner should also
manage any indigenous land Safeguards for the project,
operation and maintenance of the facility particularly in order to ensure
in accordance with all laws and consents rights issues that may impact on
the use of the site. The Private international financing options
and accordingly, bears full responsibility are available to the project.
Partner must provide evidence
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Government Support
Market Comparison
for obtaining all environmental permits, to the Government Authority that It is common for the site of the
consents and licenses. no land claims have been lodged solar PV project to be
by interested or affected parties determined by the Contracting
against the proposed site prior to Authority in order to maximise
the award of the tender by the the energy yield, lower
Government Authority. These connection costs and reduce
land claims can however be the risk of negative impact on
lodged at any time during the the electricity network.
construction or operations phase
of the project. Therefore, the
Private Partner assumes the
responsibility of settling any such
claims (to the extent such claims
are successful).
The Private Partner may seek to
pass the site risk down to the
EPC contractor and in terms of
the lease agreement (if
applicable), to the extent
possible.
Where a Private Partner is
leasing the site from a land
owner, the Private Partner may
consider including in the lease
agreement the right to change
the site in case of archaeological
discoveries / site contamination.
The Private Partner must ensure
that the construction and/or
operating contractor complies
with any applicable permits and
consents by way of the inclusion
of corresponding obligations in
the construction contracts.
Environmental The risk of the existing Developed X The Private Partner will have primary The Private Partner must ensure The project may be Contracting authorities are
and social risk latent environmental responsibility to manage the that the construction and/or treated as a "strategic requiring Private Partners to
conditions affecting the environmental and social strategy across operating contractor complies interest" project and engage in wider community
project and the the project. with any applicable permits and benefit from an expedited engagement during the
subsequent risk of The Private Partner will retain consents by way of the inclusion or co-ordinated permitting permitting phase. A recent
damage to the responsibility for social impacts which are of corresponding obligations in process. trend is a push for localisation
environment or local unavoidable as a result of the the construction contracts. of benefits including
communities. development of the project (e.g. community investment and
compensation relocation of urban requiring Private Partners to
communities / businesses). give priority to local
contractors and suppliers.
Environmental The risk of the existing Emerging X The Private Partner will have primary The Private Partner must ensure The Private Partner will International lenders and
and social risk latent environmental responsibility to manage the that the construction and/or need to take meaningful development finance
conditions affecting the environmental and social strategy across operating contractor complies steps both before and institutions are particularly
SIN-#7991991-v10
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Market Comparison
project and the the project. with any applicable permits and during the project to sensitive about environmental
subsequent risk of The Private Partner will retain consents by way of the inclusion manage social impacts of and social risks, as a result of
damage to the responsibility for social impacts which are of corresponding obligations in construction and their commitment to the
environment or local unavoidable as a result of the the construction contracts. operation. Equator Principles. They will
communities. development of the project (e.g. Investors and lenders look very closely at how these
compensation for expropriation of may expect to see a plan risks are managed at both
indigenous land rights and/or relocation of to see how these aspects private and public sector level
urban communities / businesses). are dealt with and this and this scrutiny is helpful to
may to be recorded in the mitigate the risks posed by
Finance Documents. these issues.
Contracting Authorities may
seek strong protections as
regards site remediation and
transfer provisions due to
solar PV projects having a
shorter design life than
traditional infrastructure
projects.
Design risk The risk that the project Developed X The Private Partner will have principal Pass through obligations to the Contracting Authority may Developed market solar PV
has not been designed responsibility for adequacy of the design construction contractor and include specific design projects benefit from the low
adequately for the of the facility and its compliance with the project relief principles requirements such as risk nature of the technology.
purpose required. output / performance specification. equivalent to those set out in the technology type and This allows Private Partners to
Feasibility study. Any changes to the design after being power purchase agreement will country of manufacture of submit competitive proposals
awarded as a preferred bidder requires need to be incorporated into the solar PV panels and with short design and
Approval of designs. EPC contract. inverters which provide construction timeframes.
the consent of the contracting authority,
Changes to design. although the contracting authority takes no The Private Partner may seek to grid stability support.
responsibility for the inaccuracy of the be prescriptive with the EPC
design or the risk of delays in approving contractor regarding the output
any changes. specification. It may seek a
degree of cooperation and
feedback during the
development phase to ensure
that an appropriate risk
allocation for design
responsibility is reached when
finalising the output
specification.
Design risk The risk that the project Emerging X The Private Partner will have principal Pass through obligations to the Contracting Authority may Contracting Authorities may
has not been designed responsibility for adequacy of the design construction contractor and prescribe the design of require Private Partners to
adequately for the of the facility and its compliance with the project relief principles the project with a detailed localise part of the supply
purpose required. output / performance specification. equivalent to those set out in the minimum function chain for the solar PV project.
Feasibility study. Any changes to the design after being Government agreements will specification. This may South Africa is one of the best
awarded as a preferred bidder requires need to be incorporated into the include requirements as examples of successful
Approval of designs. EPC contract. technology type and localisation for the solar PV
the consent of the Contracting Authority,
Changes to design. although the Contracting Authority takes The Private Partner may seek to country of manufacture of sector. A recent trend is
no responsibility for the inaccuracy of the be prescriptive with the EPC solar PV panels and requiring Private Partners to
design or the risk of delays in approving contractor regarding the output inverters and install equipment which
specification. It may seek a performance ratio levels. mitigates the impact of the
SIN-#7991991-v10
Government Support
Market Comparison
any changes. degree of cooperation and project on the electricity
feedback during the network such as cloud
development phase to ensure monitoring equipment and
that an appropriate risk inverters which provide some
allocation for design level of grid support service
responsibility is reached when such as frequency response.
specification.
Construction Labour dispute. Developed X Private Partner assumes all these risks, The Private Partner shall seek to If standards change after Associated risks that can
risk Interface/project except: pass these risks to the the tender, the increase construction costs
management. - where certain construction work is contractors under the EPC Contracting Authority may such as anti-dumping levies
dependent on contracting authority contract or O&M contract, as the consider increasing the on solar panels (as applied in
Commissioning case may be. Also, certain risks payments to account for Europe recently) should be
damage. work/related infrastructure work being
completed in which case risk could be can be further mitigated through increased costs of considered. Risks generally
IP right shared; and insurance. compliance or Private seen as low based on strong
breach/infringement. Partner will be excused global track record for solar
- where a labour dispute falls within the from compliance with the PV projects in recent years.
Quality assurance definition of the force majeure event under new standard.
standards. the power purchase agreement, in which
Defective material. case the risk could be shared.
Latent defects.
Subcontractor
Cost overruns where no
event applies.
Construction Labour dispute. Emerging X Private Partner assumes project Private Partner will attempt to Construction risk is Risks such as delays in
risk Interface/project management and construction risk unless address by passing through generally passed to the refunds of goods and services
management. certain work is dependent on Contracting obligations to the construction Private Partner. The tax, import duties and
Commissioning Authority work/related infrastructure work contractor and the management Contracting Authority will restrictions and restrictions on
damage. being completed in which case risk could services contractor (if usually take responsibility using foreign workers should
be shared. applicable). for force majeure events be considered.
IP right in country and change in
breach/infringement. Private Partner takes labour dispute risk
unless political. law to the extent that such
Quality assurance The transportation of the solar events affect construction
standards. Private Partner takes risk of IP right PV panels is best mitigated by of the project.
infringement. the Private Partner ensuring that
Defective material. it has adequate insurance in
Private Partner required to construct to
Latent defects. specific standards. place, where applicable. The
transportation of the solar PV
Subcontractor Private Partner takes risk of cost overrun panels is also mitigated by the
disputes/insolvency. where no compensation/relief event Private Partner passing through
Cost overruns where no applies. that risk to the EPC contractor.
event applies.
Completion The risk of Developed X The Private Partner will bear principal Generally, the Private Partner The Contracting Authority may
(including delay commissioning the responsibility for delay and cost overrun will seek to pass risks have a role of monitoring the
and cost asset on time and on risk, and will typically manage this through associated with delay in progress of construction,
SIN-#7991991-v10
Government Support
Market Comparison
overrun) risk budget and the the engagement of a suitable EPC achieving commercial operation compliance with permitting
consequences of contractor. on to the EPC contractor in order conditions and be involved in
missing either of those The principal risk arising out of delay will to minimise potential impact on the connection and
two criteria. be a delay liquidated damages payable to the project. EPC Contracts will commissioning process. The
the contracting authority under the power often contain liquidated Contracting Authority may
purchase agreement, termination of the damages and financial penalties allow for certain relief events,
power purchase agreement after, loss of and can assist in enforcing delay events or force majeure
expected revenue, ongoing costs of construction deadlines. events where delays have
financing construction and extended site Typically, the amount of the been the fault of the
costs. delay liquidated damages to be Contracting Authority such as
paid by the EPC contractor failure of the grid operator to
A scheduled COD is fixed under the connect the project in a timely
power purchase agreement. Failure to under the EPC Contracts will
factor in the delay liquidated manner.
commence the commercial operation
within the scheduled COD will result in the damages which the Private
Private Partner being subject to delay Partner is required to pay to the
liquidated damages, calculated on a daily contracting authority under the
basis and paid by deduction of a power purchase agreement and
performance security placed with the the financing costs of the project
contracting authority. Once the during the period of the delay.
performance security has been fully In relation to commissioning and
deducted, and the facility has still not connection to the grid, the EPC
commenced its commercial operation, the contract should contain an
power purchase agreement will be obligation that the EPC
terminated. contractor design and construct
In addition, any delay in achieving the facility so as to be compliant
commercial operation of the facility will with the relevant codes (as
have the practical effect of a shorter term required in terms of the relevant
of the power purchase agreement, as the Government agreements) and
operating period of the power purchase that the EPC contractor assists
agreement will be a certain period from the Private Partner in providing
the scheduled COD. the information required to
evidence compliance with the
The Private Partner is best placed to codes (as defined in the relevant
integrate complex civil works, the delivery Government agreement).
and commissioning of parts, 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 to
performance before it is allowed to fully
operate the system.
Completion The risk of Emerging X The Private Partner will bear principal The Government agreements An independent engineer The completion risk for solar
(including delay commissioning the responsibility for delay and cost overrun contain (i) a hard wired date by is sometimes appointed PV projects in emerging
SIN-#7991991-v10
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Market Comparison
and cost asset on time and on risk, and will typically manage this through which the Private Partner must by the Private Partner to markets is generally viewed
overrun) risk budget and the the engagement of a suitable EPC commence and continue act on behalf of the as lower than other energy
consequences of contractor. construction after signature of Contracting Authority in and infrastructure projects.
missing either of those The principal risk arising out of delay will the PPA, (ii) incentives for timely monitoring the Private This is due to the modular
two criteria. be the loss of expected revenue, the completion (in the form of Partner’s compliance with nature of the technology and
ongoing costs of financing construction allowing for an early operating the relevant construction the comparatively simple
and extended site costs. period and for each unit of a milestones and the nature of the construction.
facility to commence generating completion of the facility. This encourages Contracting
Scheduled COD is hard wired in the PPA electricity prior to the facility Authorities to seek short
and any delay in achieving commercial The independent
being finally completed), and (iii) engineer, on behalf of the construction timetables and
operation by the scheduled COD will have the implementation of a longstop pass risks to the private sector
the practical effect of a shorter agreement Contracting Authority
date (18 months post scheduled plays a critical role during which may not be possible
term. The operating period is reduced by COD) which creates the tension with other types of project.
an additional day and the expiry date is the various stages of
to incentivize timely completion construction and the
brought forward by one day. The last day while allowing the Private
by which the Private Partner is permitted testing and
Partner a reasonable amount of commissioning process in
to reach commercial operation is 18 time to meet its responsibilities
months after Scheduled COD and failure terms of ensuring that the
in spite of delays before the Private Partner reaches
to reach this target gives the Contracting Contracting Authority can
Authority to terminate the PPA. completion before or as
terminate the Government close as possible to the
The Private Partner is best placed to agreements. scheduled COD.
integrate complex civil works, the delivery Generally, the Private Partner
and commissioning of parts, despatching The Private Partner
will seek to pass risks should pass construction
and operations, and preventative and associated with delay in
lifecycle maintenance to ensure a reliable milestone reporting and
achieving commercial operation testing obligations on to
and punctual service for an efficient price. on to the EPC contractor in order
This may be managed through a single the contractors to ensure
to minimise potential impact on compliance with the
EPC joint venture or by the Private the project. EPC Contracts will
Partner managing a series of works, Contracting Authorities
often contain liquidated rights and the role
supply and operation/commissioning damages and financial penalties
contracts. assumed by the
and can assist in enforcing independent engineer.
The Private Partner will be expected to construction deadlines.
demonstrate adequate system The Contracting Authority
It may be difficult for the Private will be liable to make
performance before it is allowed to fully Partner to mitigate integration
operate the system. compensation payments
risks solely through contractual (in relation to cost
risk allocation, as the financing overruns) to the Private
cost / lost revenue impact is Partner to the extent that
typically very high compared to commercial operation is
the individual component parts delayed as a result of the
of the project that can affect this. material breach of the
Ensuring that the construction relevant Government
programme has sufficient float agreement by the relevant
periods for all critical stages and Contracting Authority.
that parties are incentivised to
work together to achieve the The Contracting Authority
common deadlines may be more will have a critical role to
effective strategies. play at stages of the
construction, testing and
In relation to commissioning and connection process.
connection to the grid, the EPC Examples include
SIN-#7991991-v10
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Market Comparison
contract should contain an approval rights in respect
obligation that the EPC of final design, obligations
contractor design and construct to construct grid
the facility so as to be compliant infrastructure and
with the relevant codes (as participation in the
required in terms of the relevant connection process.
Government agreements) and The Contracting Authority
that the EPC contractor assists may need to take
the Private Partner in providing responsibility for delays
the information required to caused by any act or
evidence compliance with the omission by the
codes (as defined in the relevant Contracting Authority or
Government agreement). any other public body
such as failure to issue
necessary consents in
good time or failure to
provide adequate grid
infrastructure.
Performance/ The risk that the asset Developed X The Private Partner bears the risk of The Private Partner should The Contracting Authority Contracting Authorities may
price risk is able to achieve the setting and meeting the performance ensure that appropriate may take certain limited seek protection against poor
output specification specification. guaranteed levels be included in performance risks such performance through
metrics and the price or the construction and operations as the impact of shading performance ratio and/or
The Private Partner will be paid based on availability
cost of doing so. the actual amount of power sold under the contracts with damages payable on the energy production
by the contractors for a failure to from a solar PV project guarantees. Contracting
Damage pollution power purchase agreement. If the facility Authorities may also seek
accidents. runs at a lower capacity than initially reach those guaranteed levels. from new developments
adjacent to the site or independent verification of
Meeting handback intended, it will effectively result in less energy yield assumptions
payment received by the Private Partner. restrictions on tree
requirements. felling/pruning. during the procurement
The Private Partner will receive a fixed phase.
Health and safety
vandalism. rate of Feed-in-Tariff with respect to the
sale of power under the power purchase The impact of large scale
Equipment becoming agreement up to 100% of the capacity intermittent renewables
prematurely obsolete. factor. While it is possible for the facility to on the stability of the grid
run at an increased capacity than initially system is key risk
Expansion.
intended, the price of power sold in associated with solar PV
excess of 100% of the capacity factor will projects.
the average wholesale price of electricity
sold by the contracting authority, subject
to a maximum amount equivalent to the
rate of the Feed-in-Tariff under the power
purchase agreement.
Adding more panels to what is specified
under the power purchase agreement is
not allowed and will be considered a
material breach of the power purchase
agreement. Therefore the Private Partner
should ensure that advanced technology
is used to ensure maximum export of
electricity into the grid to ensure maximum
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Market Comparison
revenue.
Performance/ The risk that the asset Emerging X The Private Partner bears the risk of The Private Partner should The Contracting Authority Contracting Authorities may
price risk is able to achieve the setting and meeting the performance ensure that appropriate may take certain also seek independent
output specification specification. guaranteed levels be included in performance risks such verification of energy yield
metrics and the price or The Contracting Authority does allow for a the construction and operations as the impact of shading assumptions during the
cost of doing so. facility to run at a lower capacity than contracts with damages payable on the energy production procurement phase. This is
Damage pollution initially intended, but does not allow for a by the contractors for a failure to from a solar PV project relevant in many emerging
accidents. facility to run at an increased capacity reach those guaranteed levels. from new developments markets where the
than initially intended and therefore the If the Private Partner achieves adjacent to the site. The Contracting Authority is
Meeting handback Contracting Authority will expecting a certain level of
requirements Private Partner should ensure that facility completion at a lower
advanced technology is used to ensure capacity than the initial usually take the risk of output from the solar PV
Health and safety maximum export of electricity into the grid contracted capacity, the grid failures or stability project in order to meet the
vandalism. to ensure maximum revenue. Contracting Authority gives the affecting the output of the customer load
Private Partner the ability post plant. requirements. We have
Equipment becoming Consideration needs to be given to the
completion but before the Contracting Authorities seen some Contracting
prematurely obsolete. ability of the Private Partner to achieve the
longstop date (being 18 months may seek protection Authorities require the Private
Expansion. necessary performance levels given the Partner to guarantee a
nature of the project and the emerging post scheduled COD), at its own against poor performance
cost, and in the shortest possible through performance ratio minimum level of output so
market in which it will be based. that the performance risk is
time, to effect repairs or and/or availability
replacements to the facility guarantees. fully transferred to the private
whereafter the capacity of the sector.
facility will be re-assessed. This The impact of large scale
is in an effort to allow the Private intermittent renewables
Partner to run the facility at the on the stability of the grid
contracted capacity, thereby system is key risk
optimising revenue and associated with solar PV
mitigating the risk of extended projects.
performance at a lower capacity.
Resource or The risk that the supply Developed X The Private Partner bears the principal Some of the cost risk can be As noted in Private Partner usually
input risk of inputs or resources responsibility to ensure an uninterrupted managed by passing the risk performance/price risk, performs the energy yield
required for the supply of inputs and solar power for the through to the contractors the Contracting Authority assessment for the site and
operation of the project project and to manage the costs of those although this will increase may assume certain risks assumes the risk that the
is interrupted or the inputs. contractor’s fees. where the energy energy yield forecasts are
cost increases. production of the project incorrect. There are limited
is affected by actions by other inputs for a solar PV
third parties such as project so the risk is generally
shading. seen as limited to the
accuracy of such forecasts
and the risk that the shading
conditions change over time.
In some countries there are
concerns over the impact of
climate change on the climatic
conditions and in particular
increased or different cloud
patterns.
Overly optimistic energy yield
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Market Comparison
forecasts are a key risk factor
in solar PV projects.
Resource or The risk that the supply Emerging X The Private Partner bears the principal Some of the cost risk can be As noted in The Contracting Authority may
input risk of inputs or resources responsibility to ensure an uninterrupted managed by passing the risk performance/price risk, undertake the initial he energy
required for the supply of inputs and solar power for the through to the contractors the Contracting Authority yield assessment for the
operation of the project project and to manage the costs of those although this will increase may assume certain risks chosen site. However, the
is interrupted or the inputs. contractor’s fees. where the energy Private Partner will usually be
cost increases. There may be specific instances where The agreements with the production of the project required to review this
the Private Partner may need the share Contracting Authority allow for is affected by actions by assessment and the risk that
this risk with the Contracting Authority, the Contracting Authority to third parties such as the energy yield forecasts are
such as reliance on local source materials share in certain identified risks in shading or lack of access incorrect. There are limited
where these may be affected by labour specific circumstances which to the electricity grid. other inputs for a solar PV
disputes, embargos or other political risks, provide relief to the Private The Contracting Authority project so the risk is generally
or where the Private Partner relies on the Partner. may also take seen as limited to the
Contracting Authority to provide works or responsibility for failure to accuracy of such forecasts
services or provide utility supplies. provide utilities required and the risk that the shading
for the testing and conditions change over time.
commissioning process. In some countries there are
concerns over the impact of
climate change on the climatic
conditions and in particular
increased or different cloud
patterns.
Overly optimistic energy yield
forecasts are a key risk factor
in solar PV projects.
Demand risk The availability by both Developed X The power purchase agreement may not It is common for renewable The Contracting Authority In certain developed markets
volume and quality of contain a take-or-pay obligation on the generators to have priority will assume primary the Private Partner may be
resource or inputs to a Contracting Authority with the Private access to the electricity system demand risk for the required to sell the output into
project or the demand Partner to be paid on the basis of the on the basis that renewable electricity produced by the a power pool. In such cases
for the product of power delivered to the Contracting generation is being encouraged project. the power purchase
service of a project by Authority. These agreements often work and the resource (wind and sun ) agreement with the
consumers/users. on a "must take" basis as the electricity is intermittent. Contracting Authority will
produced cannot be stored and the operate as contract for
Contracting Authority takes the risk that difference where the
the system does not require the electricity Contracting Authority pays the
at the times that the solar PV project is Private Partner the difference
generating. If the project is constrained between market prices for the
by the system operator the Contracting electricity and the fixed price
Authority may be required to make agreed between the
compensation payments to the Private Contracting Authority and the
Partner. Private Partner during the
procurement process. If
market prices are higher than
the fixed price the Private
Partner will owe the difference
to the Contracting Authority.
In many developed markets
there may be green benefits
SIN-#7991991-v10
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Market Comparison
associated with the production
of renewable energy. These
benefits are usually
transferred to the Contracting
Authority and are price is
included within the fixed price
per MWh agreed at the outset
so there is no additional cost
to the Contracting Authority.
In some cases the green
benefits may be sold to the
market and the benefits
shared between the parties.
Demand risk The availability by both Emerging X The Contracting Authority will assume the In certain emerging markers, in The Contracting Authority In most emerging markets the
volume and quality of risk that there is no demand for the order to mitigate the demand risk will assume primary electricity sector has not been
resource or inputs to a electricity produced. associated with having to source demand risk for the liberalised and the utility (the
project or the demand The power purchase agreement may not solar PV panels locally, certain electricity produced by the usual Contracting Entity) is
for the product of contain a express take-or-pay obligation EPC contractors and/or Private project. If the vertically integrated.
service of a project by on the Contracting Authority with the Partners have opened up solar Contracting Authority is Demand risk for IPPs is borne
consumers/users. Private Partner to be paid on the basis of PV factors in the specific local the local utility it is by the Contracting Authority.
the power delivered to the Contracting market to both mitigate and common for the A recent trend is that the
Authority. These agreements often work comply with (i) the demand risk government to stand Contracting Authority may
on a "must take" basis as the electricity and (ii) local bidding behind the obligations of seek to retain any entitlement
produced cannot be stored and the requirements. the utility as many utilities to carbon credits or other
Contracting Authority takes the risk that The Contracting Authority will in emerging markets are green benefits arising from the
the system does not require the electricity mitigate the demand risk reliant on insufficient project.
at the times that the solar PV project is assumed under the power and/or fluctuation in
generating. If the project is constrained purchase agreement through demand and consumer
by the system operator the Contracting system planning before and credit risk that raises
Authority will usually be required to make during the procurement process concerns for utility credit.
compensation payments to the Private and operations. To the extent
Partner. that supply exceeds demand in
any period this is usually
mitigated by reducing the output
of flexible generation such as
hydropower or thermal
generators. As the storage
technology improves and
reduces in cost this will enable
the Contracting Authority to
mitigate the demand risk by
storing power and then using it
to meet system peak demand.
Maintenance The risk of maintaining Developed X The Private Partner will have principal The Private Partner should take Maintenance is generally
risk the asset to the responsibility for operating and time to ensure that the output regarded as a low risk for
appropriate standards maintaining the facility in accordance with specification properly defines the solar PV projects in developed
and specifications for all applicable laws, consents and the maintenance obligations which it markets. In many markets
the life of the project. standards of a reasonable and prudent then passes on to the operations there is now a deep pool of
operator (as set out in the power purchase and maintenance contractor to trained operators and the
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Market Comparison
Increased maintenance agreement and relevant regulations) ensure that the system remains O&M activities are not
costs due to increased The Contracting Authority may inspect robust throughout the life of the complex or expensive.
volumes. and test the facility to ascertain whether it project.
Incorrect estimates and is maintained to the standards designated Pass through obligations to the
cost overruns. by the contracting authority. operations and maintenance
If the facility is not so maintained the contractor and project relief
contracting authority may require the principles equivalent to those set
Private Partner to undertake works as out in the Government
necessary to ensure that the facility is agreements will need to be
maintained to such standards, at the incorporated into the O&M
expenses of the Private Partner. contract.
Maintenance The risk of maintaining Emerging X The Private Partner will have principal The Private Partner should take The Contracting Authority Large scale solar projects in
risk the asset to the responsibility for operating and time to ensure that the output will have primary emerging markets have only
appropriate standards maintaining the facility in accordance with specification properly defines the responsibility to maintain been installed and entered
and specifications for all applicable laws, consents and the maintenance obligations which it the grid connection into operation in recent years.
the life of the project. standards of a reasonable and prudent then passes on to the operations assets. The Although the track record is
Increased maintenance operator (as set out in the relevant and maintenance contractor to Contracting Authority may limited maintenance is
costs due to increased Government agreement ) ensure that the system remains have wider obligations generally regarded as a low to
volumes. The Contracting Authority may inspect robust throughout the life of the such as maintenance of medium risk for solar PV
and test the facility to ascertain whether it project. access roads and other projects.
Incorrect estimates and utilities required for the
cost overruns. is maintained to the standards of a Pass through obligations to the
reasonable and prudent operator (as operations and maintenance operation of the project.
defined in the relevant Government contractor and project relief In some circumstances
agreement). principles equivalent to those set the Contracting Authority
out in the Government may assume
If the facility is not so maintained the responsibility for facilities
Government Authority may require the agreements will need to be
incorporated into the O&M which are shared
Private Partner to undertake works as between multiple solar PV
necessary to ensure that the facility is contract.
projects such as water
maintained to such standards. treatment plants.
Force majeure The risk that Developed X The events that will be regarded as “force If the force majeure has The Contracting Authority Private Partners will expect to
risk unexpected events majeure” is stated in the power purchase occurred and affected the will generally not take rely on business interruption
occur that are beyond agreement, which includes, among others: Private Partner, the Private natural force majeure risk and material damage
the control of the - Act of the Government, such as change Partner will be exempted from under the power purchase insurance policies to mitigate
parties and delay or in energy policy, change in law, which performing its obligations under agreement. The power the risk of force majeure
prohibit performance. prevent any party from performing its the power purchase agreement purchase agreement may events.
obligations under the power purchase during the period of such force provide for an extension
agreement; majeure. However, it is likely of the term to the extent
that there will be no revenues that the project could not
- Act of war; from the project during such deliver electricity due to
- Labour strikes, terrorism, earthquake, period. The Private Partner shall such a force majeure
flood; seek to mitigate this risk through event.
insurance.
- Disruption of power distribution system.
The obligations of the party affected by
the force majeure event will be suspended
during the period of force majeure, but the
affected party will be responsible for the
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Market Comparison
expenses required for remedying such
force majeure event, to the extent
possible.
The power purchase agreement, however,
does not contain a clause that extends the
term of the power purchase agreement in
case of the force majeure event.
Force majeure The risk that Emerging X Force majeure is a shared risk and you The agreements with the To the extent an force Contracting Authorities often
risk unexpected events can expect to see a fairly well developed Contracting Authority allow for a majeure event occurs encourage Private Partners to
occur that are beyond list of events that entitle the Private sharing of the risk of force within specified time and rely on insurance rather than
the control of the Partner to relief. majeure and provide relief to the continues for a specified allocate all force majeure risk
parties and delay or Typical events could include: Private Partner in certain time, then the Private to the Contracting Authority.
prohibit performance. instances provided specific Partner may be entitled to If relief or compensation is
- natural force majeure events, which conditions are met. To the extent an extension of term payable this may be at a
typically can be insured (eg fire / flooding / that the conditions are met, the and/or other relief from reduced rate which reflects
storm, vandalism etc), and Private Partner can be relieved the Contracting Authority the shared nature of the risk
- force majeure events which typically from liability under the which will place it in the allocation.
cannot be insured (eg strikes / protest, Government agreement to the same overall net
terror threats / hoaxes, suicide / accident, extent that it cannot perform all economic position as it
passenger emergency, emergency or a material part of its would have been in but
services, trespass etc.) obligations thereunder as a for such force majeure
result of a force majeure event. event.
Force majeure events occurring during
construction will cause a delay in revenue If the force majeure event occurs
commencement. The ability of the Private prior to scheduled COD,
Partner to bear this risk for uninsured risks scheduled COD shall be
will be limited, and the Contracting postponed by such time as is
Authority will have to bear the risk after a reasonable for the force majeure
certain period of time or level of cost has event, taking into account the
been exceeded. likely effect of any such delay. If
the force majeure event occurs
During operation, the impact of the force
after scheduled COD, but before
majeure will interrupt the revenue stream
COD (provided that the longstop
and there is scope for the risk to be
date has not occurred) the
shared with the Contracting Authority,
longstop date shall be
provided certain conditions are met.
postponed by such time as is
reasonable for the force majeure
event, taking into account the
likely effect of any such delay.
To the extent an force majeure
event occurs within specified
time and continues for a
specified time, then the Private
Partner is entitled to an
extension of term and/or other
relief from the Contracting
Authority which will place it in the
same overall net economic
position as it would have been in
but for such force majeure event
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provided that any compensation
shall not take a monetary form
and the extension of the term
shall not extend beyond 10
years.
Project insurance (physical
damage and loss of revenue
coverage) is the key mitigant for
force majeure risks that cause
physical damage. To the extent
that the Private Partner is
entitled to bring a claim under an
insurance policy, it may not be
entitled to enforce certain rights
for relief vis a vis the Contracting
Authority.
Exchange and The risk of currency Developed X The Private Partner bears all exchange The Private Partner would look Exchange and currency
interest rate risk fluctuations and or the rate and interest rate risk. to mitigate this risk through convertibility risk is generally
interest rate over the The contracting authority does not hedging arrangements under the regarded as low risk in
life of a project. assume any risk in relation to the Finance Documents, to the developed markets.
devaluation of local currency. extent possible in the market.
The contractor should also seek
to hedge any foreign currency
exposure it may have in relation
to foreign currency imports.
Exchange and The risk of currency Emerging X The Private Partner bears all exchange The Private Partner would look The Contracting Authority The Private Partner will
interest rate risk fluctuations and or the rate and interest rate risk. to mitigate this risk through may give assurances as generally take interest rate
interest rate over the The Government Authority does not hedging arrangements under the to currency convertibility risk in emerging markets and
life of a project. assume any risk in relation to the Finance Documents, to the and availability of foreign the exchange rate and
devaluation of local currency. extent possible in the market. exchange. In many convertibility risk will be borne
The contractor should also seek emerging markets the by the Contracting Authority or
to hedge any foreign currency power purchase shared. Recent
exposure it may have in relation agreement is developments include new
to foreign currency imports. denominated in USD or tools to mitigate such risks
another foreign currency from IFC and other
or subject to indexation in development banks and DFIs.
a foreign currency.
This is intended to protect
the Private Partner and
reduce the tariff and
financing costs but
exposes the Contracting
Authority to the risk of a
currency mismatch as its
revenues will generally be
in the local currency.
Insurance risk The risk that insurance Developed X The Private Partner is responsible for The Private Partner should
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Market Comparison
for particular risks is or taking insurance for the project at its own engage an insurance advisor to
becomes unavailable. expense. The power purchase agreement advise them on the insurance
is silent on the requirement with respect to arrangement required for the
insurance that the Private Partner is project.
required to undertake. The insurance
requirements will normally be stipulated by
the lenders providing financing for the
project under the Finance Documents.
Insurance risk The risk that insurance Emerging X The Private Partner has an obligation to As part of the feasibility study The Contracting Authority On emerging market
for particular risks is or insure at its own expense, as may be the Private Partner should may need to consider transactions, the Contracting
becomes unavailable. required by law and the standards of a consider whether insurance whether it stands behind Authority typically does not
reasonable and prudent operator (as might become unavailable for it unavailability of take the risk of uninsurability
defined). The Private Partner has an given the location and other insurance, in particular arising on the project,
additional obligation to ensure that its factors relevant to the project where this has been although there are good
contractors are similarly insured. and should raise this with the caused by in-country or grounds to say that it should
The Government agreements are Contracting Authority and the regional events or do so if the Private Partner
generally silent on the remedy in relation funders to the project. circumstances. has no protection for the
to insurance where insurance for a Replacement of insurances is consequences of a natural
particular risk is unavailable, but the often addressed as part of the force majeure that becomes
insurance is still required by law or would financing negotiations with uninsurable.
general be required in accordance with commercial lenders, where we
the standards of a reasonable and prudent see the development of
operator. schedules of insurance which
If an uninsured risk event occurs, the are indicative of insurance
Private Partner will typically have to bear required by law and the
this risk. standards of a reasonable and
prudent operator (as defined).
basis.
Political risk The risk of Government Developed X Political risk is included as an event of As the event is considered a Political risk in developed
intervention, force majeure under the power purchase force majeure, it is unlikely that markets have become a
discrimination, seizure agreement. the Private Partner will be able higher risk issue in recent
or expropriation of the to claim damages from the years due to the adverse
project. contracting authority under the changes in law in markets
Public sector power purchase agreement. The such as Spain, Bulgaria and
budgeting. Private Partner shall seek to Czech Republic. Private
mitigate this risk through Partners may seek
insurance. assurances that they are
protected against political
risks through the general laws
and bilateral investment
treaties.
Political risk The risk of Government Emerging X Expropriation and nationalisation of a The Contracting Authority will To the extent that certain A recent trend is splitting
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Market Comparison
intervention, material part of the facility and/or shares in need to ensure that other political risks occur, it may political risk into direct and
discrimination, seizure the Private Partner are treated as Government departments keep lead to a termination indirect political risk events.
or expropriation of the Government default. The Contracting in line with the project objectives event and the Contracting Direct political risk events are
project. Authority will bear this risk. The Private and will need to actively manage Authority stands behind those events which are clearly
Public sector Partner will be entitled to issue notice on the various stakeholders in the debt and equity. the responsibility of
budgeting. the Contracting Authority to remedy within project to achieve this. Contracting Authority or other
a specified period of time, failing which it Investors and commercial public bides such as
will be entitled to terminate the relevant lenders may also be able to expropriation. Indirect
agreement and shall be entitled to cover themselves by using political events include war,
compensation from the Contracting political risk or terrorism blockades and other events
Authority. insurance. caused by third parties.
A specific list of events of a political nature Contracting Authorities may
(such as general strikes, risks of wars / seek to apply a different
riots / embargos) is treated as force regime to the types of political
majeure events. As set out in relation to risk event.
force majeure, the Contracting Authority
will share in the responsibility for these
political events provided certain conditions
are met.
Regulatory/chan The risk of law Developed X Change in law risk is included as an event As the event is considered a The enabling legislation Change in law risk is generally
ge in law risk changing and affecting of force majeure under the power force majeure, it is unlikely that may contain specific regarded as medium to high
the ability of the project purchase agreement. the Private Partner will be able grandfathering provisions risk due to the frequency and
to perform and the price Change in law risk may be assumed by to claim damages from the which give the Private severity of changes in law. In
at which compliance the Contracting Authority although it is contracting authority under the Partner comfort. In particular this has been a
with law can be common for this to be limited and deal power purchase agreement. The several markets there will major concern in Europe and
maintained. only with discriminatory changes which Private Partner shall seek to be express protection in Australia.
Change in taxation. affect the project. mitigate this risk through the PPA with the
insurance. Contracting Authority
In many developed markets assuming the risk of
there are investor protection adverse changes in law.
regimes and well recognised
legal principles that protect
investors against retrospective
changes in law.
Regulatory/chan The risk of law Emerging X The Contracting Authority typically bears The Contracting Authority will The Government stands The risk of adverse change in
ge in law risk changing and affecting principal responsibility for changes in law need to ensure that various behind payments of the law in emerging markets may
the ability of the project post-contract signature. Government departments keep Contracting Authority in practice be regarded as
to perform and the price There is a degree of risk sharing with the the project in mind when passing should it fail to lower than some developed
at which compliance Private Partner as follows: new laws to ensure that the compensate the Private markets as the Contracting
with law can be Private Partner is not Partner. Authority is expressly taking
maintained. Private Partner would look to be kept inadvertently affected. all change in law risk under
whole in respect of changes of law which the power purchase
Change in taxation. are discriminatory (towards the project or The various Government
departments that may impact on agreement.
the Private Partner), or specific (to the
solar PV sector) or effects parties the project should therefore be
undertaking similar projects. cognisant of the risk allocation in
the project when passing laws
The Contracting Authority will not be and regulations that may have
responsible for an increase in taxes of
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general application which do not an impact on it.
discriminate against the Private Partner or The Contracting Authority has an
parties undertaking similar projects. obligation to use all reasonable
To the extent the change in law adversely endeavours to minimise and
affects the general economic position of mitigate the effects of any
the Private Partner, the Private Partner is change in law.
entitled to such compensation or relief
from the Contracting Authority as will
place the Private Partner in the same net
overall economic position as it would have
been but for such change in law.
To the extent the change in law
beneficially affects the general economic
position of the Private Partner, the Private
Partner shall pay the value of such benefit
to the Contracting Authority so that the
Private Partner remains in the same net
overall economic position as it would have
been had the materially beneficially
change in law not occurred.
The Private Partner bears a certain
financial level of risk before compensation
becomes payable, which ensures that
claims are only made for material changes
in circumstances.
Changes in law entitle the Private Partner
to engage with the Contracting Authority
to effect a remedy with a specified period
(which would more than likely be a
variation where this is necessary so as to
avoid an impossible obligation), failing
which, the Private Partner may be entitled
to compensation, including monetary
compensation.
Inflation risk The risk that the costs Developed X Inflation risk is typically borne by the The Private Partner would look In some markets the tariff will
of the project increase Private Partner. to mitigate this risk through have an element of indexation
more than expected. The power purchase agreement does not hedging arrangements under the to local inflation.
provide flexibility to the Private Partners to Finance Documents, to the
increase the Feed-in Tariff on account of extent possible in the market.
inflation. The contractor should also seek
to hedge any foreign currency
exposure it may have in relation
to foreign currency imports.
Inflation risk The risk that the costs Emerging X Inflation risk is typically borne by the The Private Partner would look The Contracting Authority It is common practice to have
of the project increase Private Partner. to mitigate this risk through will assume the risk of all or part of the tariff indexed
more than expected. The power purchase agreement does not hedging arrangements under the inflation in certain costs to deal with the impact of
provide flexibility to the Private Partners to Finance Documents, to the through the indexation of inflation.
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Market Comparison
increase the Feed-in Tariff on account of extent possible in the market. parts of the tariff to
inflation. The contractor should also seek inflation. The indexation
to hedge any foreign currency mechanism may apply to
exposure it may have in relation foreign and local
to foreign currency imports. components which have
been variable costs such
as operating costs.
Strategic risk Change in shareholding Developed X In developed markets the Contracting When structuring the project In developed markets is
of Private Partner. Authority is less concerned with locking in company, the Private Partner generally unusual for the
Conflicts of interest the shareholders for a certain period of may consider using a holding Contracting Authority to
between shareholders time. This is due to the relatively low company structure whereby the impose limitations on the
of Private Partner. level of perceived risk for solar PV shares in the project company transfers by shareholders.
projects. In some of the early adopter are held by a holding company.
markets shareholding requirements were Any change of transfer of
imposed. For example in one market, the interest in the project can then
power purchase agreement requires the be done at the level of the
original shareholders of the project holding company.
company (at the time the project has been
granted the power purchase agreement)
to maintain at least 51% of the total issued
shares of the project company until 3
years after the commercial operation date
of the project.
Strategic risk Change in shareholding Emerging X Government Authority wants to ensure Contracting Authority will limit Contracting Authorities will
of Private Partner. that the Private Partner to whom the Private Partner’s ability to generally seek to impose
Conflicts of interest project is awarded remains involved. Bids change shareholding for a controls on changes in
between shareholders awarded on basis of the Private Partner’s period. shareholding of the Private
of Private Partner. technical expertise and financial resources When structuring the project Partner. The current trend
therefore sponsors should remain during the financing phase, the is to focus on the construction
involved. Private Partner can structure the period and an initial period of
The Private Partner is required to obtain project so as to provide a operation. Following this
the Government Authority’s prior written mechanism for shareholders to period there may be
approval for the dilution, sale, assignment, dispose of their shareholding requirements that any new
cession, transfer, exchange, renunciation indirectly prior to the third party which controls the
or other disposal of the whole or any part anniversary of the commercial Private Partner demonstrate it
of the issued share capital of and/or the operation date – provided such has the technical and financial
shareholder loans in and to a direct disposal does not trigger a ability to perform the Private
shareholder in the Private Partner, during change of control. Partner's ongoing obligations.
the period commencing on the signature Shareholder interests,
date of the Government agreements and particularly minority shareholding
ending on the date which falls three (3) interests, must be protected
years after the commercial operation date through mechanisms in the
of the project. Thereafter, the shareholders’ agreement of the
shareholding can change provided that a Private Partner.
change in control (as defined) of the
Private Partner is not triggered.
Control in this context is the power,
directly or indirectly, to direct or cause the
SIN-#7991991-v10
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Market Comparison
direction of the management and policies
of a person, whether through the
ownership of voting securities or any
interest carrying voting rights, or to
appoint or remove or cause the
appointment or removal of any directors
(or equivalent officials) or those of its
directors (or equivalent officials) holding
the majority of the voting rights on its
board of directors (or equivalent body),
whether by contract or otherwise.
To the extent a change in control of the
Private Partner occurs, the consent of the
Government Authority must be obtained.
The Finance Documents will contain
similar provisions and will also require
consent from investors and lenders
following the third anniversary of the
commercial operation date for a change in
shareholding.
Disruptive The risk that a new Developed X The power purchase agreement does not The risk of disruption is
technology risk emerging technology contemplate a change of the Feed-in- increasing due to higher
unexpectedly displaces Tariff in case that the new technology has efficiency modules, new
established technology emerged, which reduces the costs of inverter technology and a
used in solar PV power generation, and the change of general trend towards
projects. technology is not permitted under the "smarter" renewable energy
power purchase agreement. Therefore, generation. Private Partners
neither the Private Partner nor the may have some level of
contracting authority will be entitled to protection through change in
require a change in the Feed-in-Tariffs law provisions.
under the power purchase agreement.
Disruptive The risk that a new Emerging X The Private Partner takes the risk of Private Partner may seek to Contracting Authorities may
technology risk emerging technology disruptive technology. place positive obligation on impose requirements on the
unexpectedly displaces Where the solar PV plant has been contractors and suppliers to Private Partner to incorporate
established technology constructed and is operating there is no upgrade technology during the new technology into the
used in solar PV risk of disruptive technology, as the procurement process. project as it becomes
projects. Private Partner at the time of constructing available, particularly where
the solar PV plant would have been this reduces overall systems
required to comply with specific minimum costs. For example, a
standards which it included in its bid and requirement to install cloud
to provide a specific amount of electricity monitoring equipment or more
into the local grid. responsive inverters which
can provide system support.
Where the solar PV plant has not yet been
developed or bid, disruptive technology
becomes more applicable, especially
where the cost of technology is directly
linked to the tariff in a competitive bidding
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process. In this scenario, disruptive
technology at a lower price may be a
benefit to the Private Partner.
In certain cases, where the solar PV
market “is more developed” increasingly
the Government Authority, is capping the
tariff that the Private Partner is entitled to
bid based on the fact that the Government
Authority is aware of new and more
competitive technology which can drive
the cost down. This requirement places
additional constraints on the Private
Partner and the possible profits of the
project.
Early The risk of a project Developed X Either party under the power purchase Depending on the type of the The Contracting Authority In general power purchase
termination being terminated before agreement will have the right to terminate project, the lenders may be able will assume the risk of agreements in developed
(including any the expiry of time and the power purchase agreement if the other to enter into an agreement with early termination for its markets do not include
compensation) the monetary party has committed a breach of the the contracting authority giving default and this may specified levels of
risk consequences of such power purchase agreement, and has the lenders step-in rights in the extend to termination compensation payable upon
termination. failed to remedy such breach after it has case of the contracting authority which has been caused termination and the parties will
received a written notice from the non- calling a Private Partner default. by the actions by other have the ability to claim
defaulting party. However, if the The lenders would typically be public bodies. damages the losses suffered
contracting authority is a defaulting party, given an opportunity to remedy as a result of early
there may be no pre-determined the breach of the Private Partner termination.
termination payment under the power to prevent the power purchase
purchase agreement. The Private Partner agreement from being
will have to claim for damages under the terminated.
general principles of law.
Early The risk of a project Emerging X The level of compensation payable on A key mitigant is to make sure The Government stands The Private Partner will
termination being terminated before early termination will depend on the the termination triggers are not behind payments as a generally be protected if the
(including any the expiry of time and reasons for termination. hair triggers and that there are result of breach by the power purchase agreement is
compensation) the monetary For termination as a result of a adequate well-defined routes for Contracting Authority. terminate due to a reason
risk consequences of such Contracting Authority default, the Private each party to remedy any The Government beyond the control of the
termination. Partner would be compensated for debt alleged default. agreements do not Private Partner. The levels
(due and payable) and equity (including a The lenders will be able to enter terminate and shall of compensation payable will
level of equity return) taking into account into direct agreements with the remain in force for so long differ depending upon the
credit balances on bank accounts, Contracting Authority giving the as any payments are due event.
insurance proceeds received as a result of lenders step-in rights in the case but not yet paid by the
the default, hedging gains and the of the Contracting Authority Contracting Authority in
realisable market value of specified calling a Private Partner default. relation to termination for
assets. The lenders would typically be Government default.
given a grace period to gather
information, manage the project
company and seek a resolution
or ultimately assign the project
documents to a suitable
substitute concessionaire.
SIN-#7991991-v10
Risk Matrix 7: Hydro power (BOOT)

 A new large-scale (greater than 100 MW) hydroelectric power project, developed as a BOOT transaction, where the power is being sold to a state-owned single buyer
 Contracting Authority nominates location for power plant
 Key risks:
 Resource or input risk
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Land purchase and The risk of acquiring Developed X The Private Partner bears full The Private Partner should, to Generally, neither the Land rights and ground
site risk title to the land to be responsibility for the suitability of the the greatest extent possible, Government authority nor conditions (in particular
used for a project, the project site, including geological, ensure that it has a complete the Contracting Authority reliable utilities records and
selection of that site geotechnical, archaeological conditions. understanding of the risks has an obligation to land charges) in developed
and the geophysical The Private Partner is obliged to obtain involved in securing the site and facilitate the issuance of markets are typically more
conditions of that site. and maintain the peaceful use and the site constraints that will the required permits or established than emerging
Planning permission. possession of the project site, as well as impact on the construction and consents, nor does it markets, and risks can be
all requisite access rights and servitudes operation of the facility. have any obligations in mitigated with appropriate
Access rights. relation to assisting with due diligence with relevant
that might be required. The Private Partner should
Security. engage with the community on securing the site. land registries and utility
The Private Partner bears full However, it will likely records.
Heritage. responsibility to procure the construction, social, environment, planning
and land acquisition issues at have a facilitating role to The Private Partner’s
Archaeological. operation and maintenance of the facility play in relation to
in accordance with all laws and consents an early stage. The land obligations with regards to
Pollution. requirements for hydro can be environment, planning indigenous rights are
and accordingly, bears full responsibility and social issues, given
Latent defects. for obtaining all environmental permits, significant and may involve the generally well legislated in
relocation of communities. the large land needs of developed markets, for
consents and licenses. hydro projects and the
The Private Partner may seek to example requirement to enter
impacts on local into indigenous land use
pass the site risk down to the communities.
EPC contractor and in terms of agreements under native title
the lease agreement (if The exception will be legislation in Australia and
applicable), to the extent where the project the equivalent under first
possible. requires new nations law in Canada.
transmission lines to be
The Private Partner must constructed; construction
ensure that the construction of transmission lines will
and/or operating contractor be done by the contract
complies with any applicable authority, but at the costs
permits and consents by way of of the Private Partner. In
the inclusion of corresponding such case, the
obligations in the construction Contracting Authority will
contracts. be responsible for
securing the right of ways
required for construction
of the transmission lines.
Land purchase and The risk of acquiring Emerging X The Contracting Authority bears the The Contracting Authority The Contracting Authority Land rights and ground
site risk title to the land to be principal risk as it is best placed to select should undertake detailed will likely be responsible conditions (in particular
used for a project, the and acquire the required land interest for ground and environmental for handling land reliable utilities records and
selection of that site the project and manage indigenous land assessments and should acquisition, social issues land charges) in emerging
and the geophysical issues and engagement with local disclose such information to and unforeseen risks and markets may be less certain
conditions of that site. communities. project bidders as part of any will be required to than in developed markets
Planning permission. The Contracting Authority would tender process. remove and/or handle where established land
generally be responsible for providing a The Contracting Authority such risks as they arise registries and utility records
Access rights. with minimal disruption to exist. Land ownership may
“clean” site, with no restrictive land title should:
Security. issues, and existing utilities and the Private Partner’s not be formally established
(1) aim to have a complete operations. and registered and
Heritage. contamination either dealt with or fully understanding of the risks
surveyed or warranted and disclosed to The Contracting Authority substantial delays may be
Archaeological. involved in securing the site suffered.
the Private Partner. and the site constraints that will may need to use its
Pollution. legislative powers to In the absence of legislation
Typically, the Contracting Authority will impact on the construction and
secure the site (e.g. in emerging markets,
SIN-#7991991-v10
Government Support
Market Comparison
Latent defects. provide a non-exclusive licence, rights of operation of the project; through expropriation / indigenous land rights issues
use and access to the lands as is (2) provide reliable data on the compulsory acquisition). and community engagement
required and sufficient for the Private site, which will allow the Private can be managed by the
Partner to perform its obligations, Partner to assess site risk; and Contracting Authority through
however, the Private Partner will not the adoption of IFC
receive any right, title or ownership (3) manage any indigenous Safeguards for the project,
interest in the lands. land rights issues that may particularly in order to ensure
impact on the use of the site. international financing options
The Private Partner will agree to accept
the site condition on an ‘as-is’ basis These issues can be significant are available to the project.
subject to the Contracting Authority’s since hydropower projects
disclosure of any relevant defects. The often involve the relocation of
Contracting Authority will often assume communities.
responsibility for any further unforeseen
or undisclosed risks, such as
contamination, endangered species,
items of geological, historical or
archaeological value.
Environmental and The risk of damage to Developed X The Private Partner will have primary The Private Partner must Developed markets Environmental and social
social risk the environment or responsibility to manage the ensure that the construction usually have fully regulation as well as public
adverse impact on environmental and social strategy across and/or operating contractor functioning regulators scrutiny is advanced in
local communities. the project. complies with any applicable and other Government or developed markets, as
The Private Partner will retain permits and consents by way of quasi-Government Private Partners and
responsibility for social impacts which are the inclusion of corresponding bodies to act as watch Contracting Authorities come
unavoidable as a result of the obligations in the construction dogs for the Private under increasing burdens to
development of the project (e.g. contracts. Partner’s compliance with develop sound environmental
compensation relocation of urban environmental and social and social risk management
communities / businesses). regulation. plans before construction
begins.
Environmental and The risk of damage to Emerging X Where the Contracting Authority dictates The Contracting Authority In view of the sensitivity Environmental and social
social risk the environment or the location of the power plant, the should conduct prior due of the environmental and regulations are often less
adverse impact on Private Partner will (subject to full diligence in order to ascertain social issues associated developed in emerging
local communities. disclosure by the Contracting Authority of the environmental fitness of the with large hydro projects markets than those in
all facts known to it) usually have site and disclose all data to the (especially where the developed markets. However,
responsibility to accept the project site on Private Partner. In practice the project may include the the participation in the project
an “as is” condition and manage the Contracting Authority in an construction of a by International lenders and
environmental and social strategy across emerging market will often not dam/reservoir) even if development finance
the project, as well as obtaining all have the capability to undertake management of these institutions will oblige the
required licences, permits and this task and therefore some of issues rests with the Private Partner to comply
authorisations as necessary. Where the the work may need to be carried Private Partner the host with more onerous
procurement process gives the Private out by the Private Partner even Government will have a international standards.
Partner latitude to select the optimal if certain risks remain allocated significant role to play in International lenders are
location for the power plant this risk will to the Contracting Authority. facilitating initiatives at sensitive about environmental
be fully allocated to the private sector. The Contracting Authority will local level to explain the and social risks, as
Social impacts on local communities will expect to approve all benefits of the project it is evidenced by their
be managed by the Private Partner under environmental plans of the promoting. commitment to the Equator
the oversight of the Contracting Authority. Private Partner. Principles. They will look
closely at how these risks are
managed and this scrutiny is
helpful to mitigate the risks
SIN-#7991991-v10
Government Support
Market Comparison
posed by these issues.
Design risk The risk that the Developed X The Private Partner will have principal Pass through obligations to the Contracting Authorities take
project has not been responsibility for adequacy of the design construction contractor and little or no design risk in
designed adequately of the facility and its compliance with the project relief principles emerging or developed
for the purpose output / performance specification. equivalent to those set out in the markets, however,
required. Any changes to the design after being power purchase agreement will Contracting Authorities in
Feasibility study. awarded as a preferred bidder requires need to be incorporated into the emerging markets are more
the consent of the Contracting Authority, EPC contract. prescriptive about the
Approval of designs. required specification.
although the Contracting Authority takes The Private Partner may seek to
Changes to design. no responsibility for the inaccuracy of the be prescriptive with the EPC
design or the risk of delays in approving contractor regarding the output
any changes. specification. It may seek a
degree of cooperation and
feedback during the
development phase to ensure
that an appropriate risk
allocation for design
responsibility is reached when
specification.
Design risk The risk that the Emerging X The Private Partner will have principal Where the project is Where certain Contracting Authorities take
project has not been responsibility for adequacy of the design competitively tendered the performance indicators little or no design risk in
designed adequately of the power plant. Whether or not the Contracting Authority will cannot be met due to emerging or developed
for the purpose Contracting Authority is concerned with typically specify the outputs actions by the markets, however,
required. the way in which the plant is designed, or required from the plant and, Contracting Authority or Contracting Authorities in
Feasibility study. merely with the output / performance of subject to ensuring compliance unforeseen emerging markets are more
the plant, will depend on whether the with applicable legal circumstances, the prescriptive about the
Approval of designs. plant is be transferred by the Private requirements and good industry Private Partner may be required specification.
Changes to design. Partner at the end of the concession practice standards, leave eligible to seek relief or
period. bidders to innovate in the compensation (see also
For a BOOT project the Contracting design. completion (including
Authority will be more concerned with the Failure to get the minimum delay and cost overrun)
detail of the specification as it will be functional specification right for risk with respect to
thinking ahead to the time when it takes the project effectively transfers commissioning).
over the plant. However, it needs to be risk back to the Contracting
careful not to intervene unduly, as this Authority.
can lead to the Private Partner seeking to
limit its liability on the basis that its
control of the project has been fettered by
the Contracting Authority.
The Contracting Authority may be more
prescriptive regarding design for
hydroelectric projects within a cascade,
where efficiency of the system as a whole
should be maximised.
Construction risk Labour dispute. Developed X Private Partner assumes all these risks, These risks can be mitigated The Contracting Authority The Private Partner takes
Interface/project except where certain construction work is through various means, (and the lenders) will construction risk in developed
SIN-#7991991-v10
Government Support
Market Comparison
management. dependent on Contracting Authority including ensuring that the have inspection, review and emerging markets. In
Commissioning work/related infrastructure work (e.g. Private Partner has the requisite and approval rights prior developed markets,
damage. transmission lines) being completed. experience in the sector to the plant entering into Contracting Authorities have
(demonstrated over a lengthy commercial operations. less involvement in the
IP right period) and obtaining construction process.
breach/infringement. appropriate security to the risk
Quality assurance of non-performance (for
standards. example, parent company
guarantees, performance bonds
Defective material.
and letters of credit).
Latent defects.
These mitigants can be
Subcontractor implemented through the
disputes/insolvency. tendering, tender evaluation and
Cost overruns where due diligence processes and by
no compensation /relief way of the security provisions in
event applies. the relevant documentation.
The power purchase agreement
will also include limited rights to
extend completion date and the
right to terminate if the facility is
not operational by a nominated
longstop date (except if caused
by Contracting Authority
assumed risk).
The Private Partner shall seek
to pass these risks to the
contractors under the EPC
contract.
Construction risk Labour dispute. Emerging X Private Partner assumes all these risks, The Private Partner shall seek The Private Partner takes
Interface/project except where certain construction work is to pass these risks to the construction risk in developed
management. dependent on Contracting Authority contractors under the EPC and emerging markets.
Commissioning work/related infrastructure work (e.g. contract or O&M contract, as the However in emerging
damage. transmission lines) being completed. case may be. Also, certain risks markets, the Contracting
Private Partner takes labour dispute risk can be further mitigated through Authority has more oversight,
IP right insurance. design approval rights and
breach/infringement. unless political in nature.
ability to witness
Quality assurance commissioning and testing
standards. than in developed markets.
Private Partners in emerging
Defective material.
markets are able to share a
Latent defects. greater degree of risk with the
Subcontractor Contracting Authority in
disputes/insolvency. respect of politically
motivated force majeure
Cost overruns where events that impact
no compensation /relief construction.
event applies.
SIN-#7991991-v10
Government Support
Market Comparison
Completion The risk of Developed X The Private Partner will bear principal Generally, the Private Partner The Contracting Authority Achievement of construction
(including delay commissioning the responsibility for delay and cost overrun will seek to pass risks may allow for certain deadlines may be easier as
and cost overrun) asset on time and on risk, and will typically manage this associated with delay in relief where delays have permitting delays are less
risk budget and the through the engagement of a suitable achieving commercial operation arisen from either the likely and Contracting
consequences of EPC contractor. on to the EPC contractor in fault of the Contracting Authorities are likely to have
missing either of those The principal risk arising out of delay will order to minimise potential Authority or the grid greater experience and
two criteria. be a delay liquidated damages payable to impact on the project. EPC operator. available resources to meet
the Contracting Authority under the Contracts will often contain their obligations.
power purchase agreement, termination liquidated damages and
of the power purchase agreement after, financial penalties and can
loss of expected revenue, ongoing costs assist in enforcing construction
of financing construction and extended deadlines.
site costs. Typically, the amount of the
A schedule COD is fixed under the power delay liquidated damages to be
purchase agreement. Failure to paid by the EPC contractor
commence the commercial operation under the EPC Contracts will
within the scheduled COD will result in factor in the delay liquidated
the Private Partner being subject to delay damages which the Private
liquidated damages, calculated on a daily Partner is required to pay to the
basis and paid by deduction of a Contracting Authority under the
performance security placed with the power purchase agreement and
Contracting Authority. Once the the financing costs of the project
performance security has been fully during the period of the delay.
deducted, and the facility has still not In relation to commissioning and
commenced its commercial operation, connection to the grid, the EPC
the power purchase agreement may be contract should contain an
terminated. obligation that the EPC
The Private Partner is best placed to contractor design and construct
integrate complex civil works, the delivery the facility so as to be compliant
and commissioning of parts, despatching with the relevant codes (as
and operations, and preventative and required in terms of the relevant
lifecycle maintenance to ensure a reliable Government agreements) and
and punctual service for an efficient price. that the EPC contractor assists
This may be managed through a single the Private Partner in providing
EPC joint venture or by the Private the information required to
Partner managing a series of works, evidence compliance with the
supply and operation/commissioning codes (as defined in the
contracts. relevant Government
agreement).
The Private Partner will be expected to
operate the system.
Completion The risk of Emerging X The Private Partner will bear principal A power plant can only An independent engineer Some emerging markets
(including delay commissioning the responsibility for delay and cost overrun complete commissioning and is sometimes appointed hydro projects have faced
and cost overrun) asset on time and on risk, and will typically manage this achieve commercial operation if by the Private Partner to significant construction issues
risk budget and the through the engagement of a suitable it is able to full test the plant by act on behalf of the and the parties will need to
consequences of EPC contractor. exporting electricity to the grid. Contracting Authority in be prepared to enforce their
missing either of those monitoring the Private respective rights to manage
SIN-#7991991-v10
Government Support
Market Comparison
two criteria. The principal risk arising out of delay will To minimise uncertainty a Partner’s compliance with the consequences of a failure
be the loss of expected revenue, the Private Partner will often take the relevant construction to meet the construction
ongoing costs of financing construction responsibility for building milestones and the milestones.
and extended site costs. connection facilities with the completion of the facility.
Generally, the Private Partner is must grid, even if these are handed The independent
reach the commercial operation date no over to the host utility after engineer, on behalf of the
later than 180 days after the Scheduled construction. Contracting Authority
COD and failure to reach this target The Government agreements plays a critical role during
allows the Contracting Authority to contain (i) a hard wired date by the various stages of
terminate the PPA. which the Private Partner must construction and the
The Private Partner is best placed to commence and continue testing and
integrate complex civil works, the delivery construction after signature of commissioning process
and commissioning of parts, despatching the PPA and (ii) the in terms of ensuring that
and operations, and preventative and implementation of a longstop the Private Partner
lifecycle maintenance to ensure a reliable date (180 days post scheduled reaches completion
and punctual service for an efficient price. COD) which creates the tension before or as close as
This may be managed through a single to incentivize timely completion possible to the scheduled
EPC joint venture or by the Private while allowing the Private COD.
Partner managing a series of works, Partner a reasonable amount of The Contracting Authority
supply and operation/commissioning time to meet its responsibilities will have a critical role to
contracts. in spite of delays before the play at stages of the
Contracting Authority can construction, testing and
The Private Partner will be expected to terminate the Government
demonstrate adequate system commissioning process
agreements. in terms of ensuring that
operate the system. Generally, the Private Partner any rights that it has to
will seek to pass risks comment on design
associated with delay in development and testing
achieving commercial operation results do not adversely
on to the EPC contractor in delay the project.
order to minimise potential The Contracting Authority
impact on the project. EPC may allow for certain
Contracts will often contain relief events or cost
liquidated damages and overruns have arisen
financial penalties and can from either the fault of the
assist in enforcing construction Contracting Authority or a
deadlines. Private Partners host country utility, or
often build in a degree of flat or natural force majeure
buffer between the scheduled events affecting the
COD under the EPC contract Contracting Authority.
and the scheduled COD under
the power purchase agreement. If the Contracting
Authority is required to
build significant
transmission facilities, the
issue of delayed
completion and ability to
pay deemed
commissioning payments
to the Private Partner is a
key risk.
SIN-#7991991-v10
Government Support
Market Comparison
The Contracting
Authority’s obligation to
make deemed
commissioning payments
may need to be secured
by a Government
guarantee.
Performance/ price The risk that the asset Developed x The Private Partner bears the risk of The Private Partner will mitigate Availability/capacity risks will
risk is able to achieve the setting and meeting the performance its risk through the terms of the generally be considered
output specification specification in the power purchase EPC and O&M contracts with manageable through pass
metrics and the price agreement. third parties. EPC contractors down to experienced
or cost of doing so. The Private Partner will be paid based on will typically be obliged to pay subcontractors.
Damage pollution the actual amount of power sold under liquidated damages where The Private Partner receives
accidents. the power purchase agreement. If the tested capacity and efficiency will generally receive no
facility runs at a lower capacity than are short of guaranteed levels. “political” force majeure
Meeting handback Operation and maintenance
requirements initially intended, it will effectively result in protection.
less payment received by the Private contractor are also often
Health and safety Partner. penalised for poor performance,
vandalism. but noting that limits on liability
may be modest compared to the
Equipment becoming
loss that may be suffered.
Expansion.
Performance/ price The risk that the asset Emerging x Having negotiated and signed the power The Private Partner will mitigate The Private Partner will Additional availability
risk is able to achieve the purchase agreement the Private Partner its risk through the terms of the expect host adjustments may be required
output specification bears the risk of achieving the availability EPC and O&M contracts with country/”political” force in respect of political force
metrics and the price and capacity levels specified. third parties. EPC contractors majeure protection in majeure and natural force
or cost of doing so. The Private Partner may be liable for will typically be obliged to pay respect of events which majeure events affecting the
Damage pollution liquidated damages if the plant fails to liquidated damages where might reduce availability. Contracting Authority.
accidents. meet the minimum contracted capacity. performance levels are short of
This compensates the Contracting guaranteed levels. Operation
Meeting handback and maintenance contractor are
requirements Authority for the reduced benefit from the
river resource. also often penalised for poor
Health and safety performance, but noting that
vandalism. The Contracting Authority will generally limits on liability may be modest
bear the risk of political force majeure, compared to the loss that may
Equipment becoming defaults by the Contracting Authority or be suffered.
prematurely obsolete. Government parties or force majeure
Expansion. affecting the Contracting Authority.
Where performance has been interrupted
by these events, the Private partner can
expect deemed energy payments.
Resource or input The risk that the supply Developed X The Private Partner bears the principal The Private Partner will be
risk of inputs or resources responsibility to ensure sufficient water required by its lenders to justify
required for the flow for the project. its hydrology assumptions
operation of the project based on several years of
is interrupted or the hydrology data collection and
cost increases. probability analysis of water
SIN-#7991991-v10
Government Support
Market Comparison
levels.
Resource or input The risk that the supply Emerging X The nature of the risk will vary, The Private Partner can mitigate Monthly payments to the Emerging markets are
risk of inputs or resources depending on whether the project is run- any element of hydrology risk by Private Partner may generally more likely to host
required for the of-river or a dam. But in either case it is providing in the power purchase include certain hydro projects in situations
operation of the project to be expected that the reliability of the agreement that non-availability calculations that could where there is inadequate
is interrupted or the water supply will be assessed by of water will not be a contract alleviate this risk – e.g. hydrology data and/or a
cost increases. reference to historical records which default and it should still be paid deemed availability shortage of water could be an
should have been maintained over a long availability payments. payments. imminent risk.
period of years by the host country. If
detailed and accurate records exist a
Private Partner may accept the risk. In
many cases, data of this nature has not
been collected or maintained for a
sufficient period of time. There are other
issues which can also make this risk
difficult for a Private Partner to bear – for
instance, if there is a possibility that the
host country could take actions upstream
of the power plant location which would
affect the water supply ( e.g. granting
concessions for other power projects).
Demand risk The availability by both Developed X The Contracting Authority will take the As it will be absorbing the Generally no The volume of firm energy is
volume and quality principal role in managing the demand principal demand risk, the Government support likely to be lower than in an
along with risk, but a degree of risk may be shared Contracting Authority should do would be required. emerging market.
transportation of with the Private Partner. The power a full assessment of demand
resource or inputs to a purchase agreement will contain a risks. The Private partner will
project or the demand volume of firm energy on a take or pay model their base case on the
for the product of basis. That volume will be sufficient to firm energy and run upside
service of a project by secure the long term revenue stream to projections on the excess
consumers/users. ensure repayment of the debt financing. energy that may be dispatched.
Demand risk The availability by both Emerging X Contracting Authority will have primary As it will be absorbing this Depending on the credit Commonly, the project’s
volume and quality responsibility to manage the demand risk. demand risk, the Contracting rating of the Contracting energy output is contracted
along with Authority should do a full Authority, Government on a take or pay basis for
transportation of assessment of demand risks. support may be required base load.
resource or inputs to a to guarantee the take or
project or the demand pay payments to the
for the product of Private Partner, as well
service of a project by as a put option should
consumers/users. the Contracting Authority
default and the power
purchase agreement is
terminated.
Maintenance risk The risk of maintaining Developed X The Private Partner will have The power purchase agreement The market standard is for
the asset to the responsibility for maintenance necessary will contain a tariff mechanism the Private Partner to take
appropriate standards to ensure performance standards are under which part of the payment maintenance risk in order to
and specifications for met. will be fixed by reference to the ensure that specified
SIN-#7991991-v10
Government Support
Market Comparison
the life of the project. The Private Partner generally assumes plant meeting or exceeding an standards and outputs are
Increased maintenance the overall risk of periodic and availability performance met.
costs due to increased preventative maintenance, emergency standard. This mechanism will
volumes. maintenance work, work stemming from allow for the plant to
design or construction errors and reduce/shut down generation for
Incorrect estimates and rehabilitation work. a certain number of days each
cost overruns. year to carry out planned
maintenance. The maintenance
risk can also be partially passed
through from the Private Partner
to the O&M contractor and/or
long term service agreement
provider.
Maintenance risk The risk of maintaining Emerging X The Private Partner will have The power purchase agreement The market standard is for
the asset to the responsibility for maintenance necessary will contain a tariff mechanism the Private Partner to take
appropriate standards to ensure performance standards are under which part of the payment maintenance risk. In
and specifications for met. will be fixed by reference to the emerging markets, build,
the life of the project. The Private Partner generally assumes plant meeting or exceeding an operate, transfer (BOT)
Increased maintenance the overall risk of periodic and availability performance projects are more common
costs due to increased preventative maintenance, emergency standard. This mechanism will than in developed markets.
volumes. maintenance work, work stemming from allow for the plant to Where the plant will transfer
design or construction errors and reduce/shut down generation for at the end of the term of the
Incorrect estimates and a certain number of days each power purchase agreement,
cost overruns. rehabilitation work.
year to carry out planned the Contracting Authority is
maintenance. The maintenance generally more concerned
risk can also be partially passed with the standard of
through from the Private Partner maintenance and may
to the O&M contractor and/or impose warranties as to the
long term service agreement condition of the plant at the
provider. time of handover.
Force majeure risk The risk that Developed X Force majeure is a shared risk and a Project insurance (physical The Private Partner is not
unexpected events fairly well developed list of events entitles damage and loss of revenue typically entitled to
occur that are beyond the Private Partner to relief. coverage) is the key mitigant for compensation from the
the control of the Typical events include (i) war, armed force majeure risks that cause Contracting Authority and will
parties and delay or conflict, terrorism or acts of foreign physical damage. also look to insurance to
prohibit performance. enemies; (ii) nuclear or radioactive manage this risk.
contamination; (iii) chemical or biological
contamination; (iv) natural disasters; or
(v) discovery of any species-at-risk,
fossils, or historic or archaeological
artefacts that require the project to be
abandoned.
The Private Partner takes the risk of force
majeure that prevents or delays
generation or receipt of energy by the
Contracting Authority. Whilst the Private
Partner will be excused from default, it
will not receive revenue if it is unable to
SIN-#7991991-v10
Government Support
Market Comparison
generate.
Force majeure risk The risk that Emerging X Force majeure is a shared risk and a Project insurance (physical Generally speaking, The Contracting Authority
unexpected events fairly well developed list of events entitles damage and loss of revenue where parties are unable often does not provide
occur that are beyond the Private Partner to relief. coverage) is the key mitigant for to agree on a way compensation for termination
the control of the Typical events include (i) war, armed force majeure risks that cause forward following a force arising from a “natural” force
parties and delay or conflict, terrorism or civil disturbance; (ii) physical damage. majeure event affecting majeure affecting the Private
prohibit performance. strikes; (iii) natural disasters. In addition the Contracting Authority, Partner, on the grounds that
change in law, lapse of consents and an amount of this should be insured. But it
acts or omissions by Governmental compensation should will compensate for “natural”
authorities are included within the continue to be payable by force majeure affecting the
definition of force majeure. However, this the Contracting Authority Contracting Authority or
latter group of politically motivated events to the Private Partner in political/host country events.
are treated separately for risk purposes. order to service the
See political risks. Private Partner ’s debt
obligations during the
In emerging markets, the Contracting course of the event.
Authority often takes the hydrology risk Where the project is
and abnormal water levels (outside of the terminated, the
plant’s design parameters) will be Contracting Authority
considered as a force majeure event. may be required to fully
The Private Partner takes the risk of force compensate the Private
majeure that affects the Private Partner Partner for debt owed to
or its contractors and prevents or delays the lenders.
generation. Whilst the Private Partner will
be excused from default, it will not
receive revenue if it is unable to
generate. It may, however, be entitled to
an extension of the term of the power
purchase agreement.
The Contracting Authority generally takes
the risk of force majeure affecting it or the
grid and prevents the Contracting
Authority taking delivery of the energy
that the Private Partner was capable of
producing. The Contracting Authority
pays for energy deemed to have been
generated in these situations. There may
be a degree of risk sharing as to the
amount of payment.
Exchange and The risk of currency Developed X The Private Partner bears all exchange Exchange and interest rates The tariff is denominated in
interest rate risk fluctuations and or the rate and interest rate risk. risks are typically not accounted local currency.
interest rate over the The Contracting Authority does not for beyond the Private Partner’s
life of a project. assume any risk in relation to the own hedging arrangements.
devaluation of local currency.
SIN-#7991991-v10
Government Support
Market Comparison
Exchange and The risk of currency Emerging X The Private Partner bears all interest rate Exchange and interest rates The Government may be The tariff is often
interest rate risk fluctuations and or the risk. risks are typically not accounted expected to provide denominated in US dollars.
interest rate over the The Contracting Authority often assumes for beyond the Private Partner’s guarantees regarding Sometimes the devaluation of
life of a project. the currency risk in relation to the own hedging arrangements. currency convertibility local currency beyond a
capacity payment, which is often Exchange rate risk mitigation and ability to repatriate certain threshold acts as a
denominated in US dollars. can be achieved by having a capital and dividends. trigger for non-default
tariff split into 2 currency termination. Alternatively it
components, with a local could trigger a “cap and
currency element reflecting the collar” subsidy arrangement
proportion of works the Private from the Contracting
Partner can source in-country. Authority.
Insurance risk The risk that insurance Developed X The Private Partner is responsible for The Private Partner should The Contracting Authority
for particular risks is or taking insurance for the project at its own engage an insurance advisor to generally takes no risk of
becomes unavailable. expense. The power purchase advise them on the insurance uninsurability.
agreement is silent on the requirement arrangement required for the
with respect to insurance that the Private project.
Partner is required to undertake. The
insurance requirements will normally be
stipulated by the lenders providing
financing for the project under the
Finance Documents.
Insurance risk The risk that insurance Emerging X The Private Partner has an obligation to As part of the feasibility study The Contracting Authority On emerging market
for particular risks is or insure at its own expense, as may be the Private Partner should may need to consider transactions, the Contracting
becomes unavailable. required by law and the standards of a consider whether insurance whether it stands behind Authority typically does not
reasonable and prudent operator (as might become unavailable for it unavailability of take the risk of uninsurability
defined). The Private Partner has an given the location and other insurance, in particular arising on the project,
additional obligation to ensure that its factors relevant to the project where this has been although there are good
contractors are similarly insured. and should raise this with the caused by in-country or grounds to say that it should
The Government agreements are Contracting Authority and the regional events or do so if the Private Partner
generally silent on the remedy in relation funders to the project. circumstances. has no protection for the
to insurance where insurance for a Replacement of insurances is consequences of a natural
particular risk is unavailable, but the often addressed as part of the force majeure that becomes
insurance is still required by law or would financing negotiations with uninsurable.
general be required in accordance with commercial lenders, where we
the standards of a reasonable and see the development of
prudent operator. schedules of insurance which
If an uninsured risk event occurs, the are indicative of insurance
Private Partner will typically have to bear required by law and the
this risk. standards of a reasonable and
prudent operator (as defined).
(e.g. force majeure termination) if it
cannot reinstate the project on an
economic basis.
SIN-#7991991-v10
Government Support
Market Comparison
Political risk The risk of Developed X Political risk events are often included Investors and commercial Generally there is little
Government within the definition of force majeure, lenders may be able to cover protection offered for political
intervention, which relieves the Private Partner from themselves by using political risks.
discrimination, seizure default. However, the Private Partner is risk or terrorism insurance.
or expropriation of the generally not entitled to deemed energy Bilateral investment treaties
project. payments where it has been unable to may provide a degree of
Public sector generate because of political risk events. protection for expropriation.
budgeting. The participation in the project
of export credit agencies,
multilaterals, domestic investors
(debt, equity or capital markets)
provides a degree of comfort
that a political solution may
resolve political risk issues that
arise.
Political risk The risk of Emerging X The Contracting Authority takes the risk The Contracting Authority will Depending on the credit Political risk is allocated to
Government for set of political related events that are need to ensure that other rating of the Contracting the Contracting Authority in
intervention, included within the definition of force Government departments keep Authority, Government emerging markets.
discrimination, seizure majeure. They consist of (i) change in in line with the project objectives support may be required
or expropriation of the law, (ii) refusal or lapse of consents, and and will need to actively to guarantee the deemed
project. (iii) acts or omissions of Governmental manage the various energy payments to the
Public sector authorities. The Contracting Authority stakeholders in the project to Private Partner, as well
budgeting. takes the risk in the following ways: (i) by achieve this. as termination payment
making deemed energy payments to the Investors and commercial under the power
Private Partner where it is unable to lenders may also be able to purchase agreement..
generate due to such a political risk, (ii) cover themselves by using
adjusting the tariff to compensate for any political risk or terrorism
additional costs incurred and (iii) where insurance.
the PPA is terminated a result of a
political risk, the Contracting Authority is
obliged to purchase the plant by paying a
purchase price adequate to cover debt,
equity and some return on equity.
Regulatory/change The risk of law Developed X The risk of change in law mostly sits with The tariff may be subject to a Contracting Authorities
in law risk changing and affecting the Private Partner. market indexation mechanism, assume little risk for change
the ability of the project Change in law is often included within the which provides a degree of in law.
to perform and the definition of force majeure, which relieves protection against changes in
price at which the Private Partner from default. law that have a material impact
compliance with law However, the Private Partner is generally on that market index.
can be maintained. not entitled to deemed energy payments
Change in taxation. where it has been unable to generate
because of a change in law.
Where the change in law increases the
private Partner’s costs, adjustments to
the tariff (if any) are often dependent on
the Contracting Authority’s ability to
SIN-#7991991-v10
Government Support
Market Comparison
recover the change in law through the
end user tariff. Alternatively, the term of
the power purchase agreement may be
extended to allow the Private Partner the
opportunity to recover the extra costs
arising from the change in law.
Regulatory/change The risk of law Emerging X In emerging markets without a previous The Contracting Authority will Depending on the credit The Private Partner is likely
in law risk changing and affecting track record of private participation in the need to ensure that various rating of the Contracting to have a greater level of
the ability of the project power sector, the Contracting Authority Government departments keep Authority, Government protection from changes in
to perform and the takes change in law risk for all changes in the project in mind when support may be required law to reflect the greater risk
price at which law, subject to de minimis thresholds. passing new laws to ensure that to guarantee the energy of change and to attract
compliance with law However, as an emerging market’s the Private Partner is not payments to the Private investors. Emerging markets
can be maintained. private power industry matures, the risk inadvertently affected. Partner, as well as may provide protection for all
Change in taxation. of change in law will be shared as The various Government termination payment changes in law, with the
follows: departments that may impact on under the power possible exception of taxes.
the project should therefore be purchase agreement
The Private Partner can expect to be where change in law has
protected against changes in law which cognisant of the risk allocation
in the project when passing laws rendered performance of
are: (i) discriminatory (to the project or the power purchase
the Private Partner) (ii) targeted at the and regulations that may have
an impact on it. agreement illegal.
power sector). But even such change in
law protection may be subject to a de The Contracting Authority has
minimis threshold before the Private an obligation to use all
Partner is entitled to compensation. The reasonable endeavours to
Private Partner will not be compensated minimise and mitigate the
for general changes in law which as the effects of any change in law.
name suggests are of general application
to a whole country e.g. changes in
general income taxes.
Changes in law typically result in an
adjustment to the tariff so that the original
economic basis of the transaction is
preserved. This adjustment reflects both
increased costs and savings. In theory
this means that the tariff may be adjusted
in the Contracting Authority’s favour.
Some projects only permit the Private
Partner to claim relief for general
changes in law occurring after completion
of construction. This approach may be
justified if the country’s legal regime
ensures that the prevailing legal regime
at the start of construction is fixed until
the works are complete (i.e. does not
operate retrospectively to projects in
progress).
Inflation risk The risk that the costs Developed X On availability-based projects, during the End user tariffs tend to adjust Inflation is typically minimal
of the project increase term of the power purchase agreement, for inflation. and does not experience
SIN-#7991991-v10
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Market Comparison
more than expected. the availability payment will typically fluctuations to the extent of
include fixed and variable components. emerging markets.
The fixed and variable components linked
to operation and maintenance costs are
indexed for inflation.
Inflation risk The risk that the costs Emerging X Inflation risks during construction are To a lesser extent than Depending on the credit The fluctuation of inflationary
of the project increase typically borne by the Private Partner, developed markets, end user rating of the Contracting costs is a greater risk in
more than expected. while inflation risks during the operation tariffs reflect a degree of Authority, Government emerging markets than it is in
period will typically be primarily borne by inflationary adjustment. support may be required developed markets and the
the Contracting Authority. to guarantee the energy Private Partner’s expectation
On availability-based projects, during the payments to the Private will be that this risk is borne
term of the power purchase agreement, Partner, including any and managed by the
the availability payment will typically elements of such Contracting Authority during
include fixed and variable components. payments that are the term of the power
The fixed and variable components linked indexed for inflation. purchase agreement.
to operation and maintenance costs are
indexed for inflation. There may be
foreign and local operation and
maintenance components which are
indexed to US CPI and local CPI
respectively.
Strategic risk Change in Developed X Change of control will often be prohibited When structuring the project Developed markets tend to
shareholding of Private or limited until the commercial operation company, the Private Partner be less restrictive on
Partner. date or a specified period thereafter. may consider using a holding shareholding changes than
Conflicts of interest company structure whereby the emerging markets.
between shareholders shares in the project company
of Private Partner. are held by a holding company.
Any change of transfer of
interest in the project can then
be done at the level of the
holding company.
Strategic risk Change in Emerging X Share transfers are often prohibited until When structuring the project Contracting Authorities in
shareholding of Private five years after the commercial operation company, the Private Partner emerging markets tend to
Partner. date and thereafter the lead shareholder may consider using a holding have a greater degree of
Conflicts of interest may be required to maintain a majority company structure whereby the control over shareholding
between shareholders shareholding for a specified period shares in the project company changes for a longer period
of Private Partner. thereafter. In addition to requirements are held by a holding company. of time than developed
under the power purchase agreement, Any change of transfer of markets.
the shareholders may make direct interest in the project can then
undertakings to the Contracting Authority. be done at the level of the
holding company.
Disruptive The risk that a new Developed X Power purchase agreements do not The Contracting Authority needs Contracting Authority
technology risk emerging technology address the issue of disruptive to be cognisant of potential assumes the risk of disruptive
unexpectedly displaces technologies. To the extent that the disruptive technologies when technologies.
established technology Contracting Authority agrees to purchase planning the generation portfolio
used in large scale a firm quantity of energy on a take or pay
SIN-#7991991-v10
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Market Comparison
hydro projects. basis, the Contracting Authority assumes for the grid.
the risk that disruptive technologies may
render alternative forms of generation
more attractive.
Even where the Private Partner does not
have a firm energy commitment, in a grid
which contains conventional forms of fuel
based generation, hydro generation‘s
position in any merit order dispatch
insulates the Private Partner from the risk
that it will not be dispatched by the
Contracting Authority.
Disruptive The risk that a new Emerging X The Contracting Authority bears the risk The Contracting Authority needs Take or pay Contracting Authority
technology risk emerging technology of obsolescence. The power purchase to be cognisant of potential commitments by assumes the risk of disruptive
unexpectedly displaces agreement does not specifically deal with disruptive technologies when Contracting Authorities technologies.
established technology the issue, but the take or pay planning the generation portfolio with a poor credit rating
used in large scale commitment ensures the Private Partner for the grid. are often backed by
hydro projects. continues to be paid regardless of Government guarantee.
whether emerging technology makes
alternative generating sources more
attractive.
Early termination The risk of a project Developed X Where termination arises from a party’s The Private partner may be able The early termination risk is
(including any being terminated default, the defaulting party may be to mitigate its losses through more evenly shared between
compensation) risk before the expiry of obliged to pay damages based on a mark insurance. Where the plant is the parties, then the
time and the monetary to market assessment of the losses. able to generate, the Private emerging market.
consequences of such Generally, however, the parties do not Partner may be able to mitigate Termination for default will
termination. specify the calculation of termination its losses by selling the energy give rise to a claim for
payments and they preserve their rights produced to a spot market or an damages for breach of the
to claim damages at law. For breach of alternate buyer. power purchase agreement.
the power purchase agreement.
Generally, there are no termination
payments where termination arises from
force majeure, including political risk.
Early termination The risk of a project Emerging X The principal risk is born by the A key mitigant is to make sure The lenders will require The Contracting Authority
(including any being terminated Contracting Authority. the termination triggers are not direct agreements with makes comprehensive
compensation) risk before the expiry of The level of compensation payable on hair triggers and that there are the Contracting Authority liquidated termination
time and the monetary early termination will depend on the adequate well-defined routes for giving the lenders step-in payments for its own default,
consequences of such reasons for termination and typically for: each party to remedy any rights in the case of the political force majeure and
termination. alleged default. Contracting Authority natural force majeure
(1) Contracting Authority default, force calling a default affecting the Contracting
majeure affecting the Contracting Political risk insurance may be
available to cover the risk of the termination or in the Authority.
Authority and political force majeure – the event of the Private
Contracting Authority is obliged to Contracting Authority or
Government guarantor Partner being in default
purchase the plant and the Private under the loan
Partner would be entitled to defaulting on its payment
obligation. documentation. The
compensated for senior debt, junior debt, lenders would typically be
equity and a level of equity return for a given a grace period to
specified period; gather information,
SIN-#7991991-v10
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(2) Private Partner default – the manage the project
Contracting Authority would have the company and seek a
option to purchase the plant and if resolution or ultimately
exercised, it would compensate the novate the project
Private Partner for the senior debt; and documents to a suitable
(3) Natural force majeure affecting the substitute
Private Partner – often no obligation on concessionaire.
the Contracting Authority to purchase the Depending on the credit
project. rating of the Contracting
It is common for the senior debt to be Authority, Government
guaranteed as a minimum in every support may be required
termination scenario where the plant is to guarantee the
transferred to the Contracting Authority. termination payments
under the power
purchase agreement.
SIN-#7991991-v10
Risk Matrix 8: Power transmission (BOOT)

 New power transmission project, developed as a Build-Own-Operate-Transfer transaction with availability-based payments
 Assumes the Contracting Authority owns and operates the existing electric system in which the new transmission facilities will be built and interconnected
 Project scope may include associated infrastructure, such as substations
 Assumes Contracting Authority could issue functional specification which would permit a variety of technical solutions (e.g. different conductor and tower
configurations)
 Key risks:
 Disruptive technology risk
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Land purchase The risk of acquiring Developed X The Contracting Authority will generally The Contracting Authority should The Contracting Authority Land rights and ground
and site risk title to the land to be bear the principal risk and is best placed undertake detailed ground, may need to use its conditions (in particular
used for a project, the to select and acquire the required land environmental and social legislative powers to reliable utilities records and
selection of that site interests for the project. That said, there assessments and should secure the site (e.g. land charges) in developed
and the geophysical may be some cases where the Private disclose such information to the through expropriation / markets are typically more
conditions of that site. Partner will bear such risks, particularly in Private Partner as part of the compulsory acquisition). established than emerging
Planning permission. jurisdictions with well-developed bidding process. Even with a legally clear markets, and risks can be
administrative processes which provide The Contracting Authority site, Government mitigated with appropriate due
Access rights. access to lands with relative cost diligence with relevant land
should, to the greatest extent enforcement powers may
Security. certainty. possible, ensure that it has a be needed to properly registries and utility records.
Heritage. The Contracting Authority will generally complete understanding of the secure the site for the The Private Partner’s
bear the risks associated with unforseen risks involved in securing the site private sector. There may obligations with regards to
Archaeological.
geophysical conditions, archaeological and the site constraints that will be historic encroachment indigenous rights are
Pollution. discoveries, heritage discoveries, pollution impact on the construction and issues that the Private generally well legislated in
Latent defects. and latent defects. The Private Partner operation of the system. Partner cannot be developed markets, for
may take some risk for dealing with The Contracting Authority should expected to deal with. example requirement to enter
adverse conditions revealed by surveys also manage any indigenous into indigenous land use
but other unforeseeable ground risks (e.g. land rights issues that may agreements under native title
archaeological risks) are likely to need to impact on the use of the site. legislation in Australia and the
be held by the Contracting Authority. equivalent under first nations
Prior to awarding the tender, the law in Canada.
On the other hand, the Private Partner Contracting Authority could
may be expected to address certain (through legislation and a proper
restrictive land title issues and otherwise consultation process) limit the
address the concerns of existing utilities. ability for potential land right
owners or neighbouring
properties and trades to raise
claims on the land and/or for
injurious affection.
Land purchase The risk of acquiring Emerging X The Contracting Authority will generally The Contracting Authority should The Contracting Authority Land rights and ground
and site risk title to the land to be bear the principal risk and is best placed undertake detailed ground, may need to use its conditions (in particular
used for a project, the to select and acquire the required land environmental and social legislative powers to reliable utilities records and
selection of that site interests for the project. That said, there assessments and should secure the site (e.g. land charges) in emerging
and the geophysical may be some cases where the Private disclose such information to the through expropriation / markets may be less certain
conditions of that site. Partner will bear such risks, particularly in Private Partner as part of the compulsory acquisition). than in developed markets
Planning permission. jurisdictions with well-developed bidding process. Even with a legally clear where established land
administrative processes which provide The Contracting Authority site, Government registries and utility records
Access rights. access to lands with relative cost exist.
should, to the greatest extent enforcement powers may
Security. certainty. possible, ensure that it has a be needed to properly In the absence of legislation in
Heritage. The Contracting Authority will generally complete understanding of the secure the site for the emerging markets, indigenous
bear the risks associated with unforseen risks involved in securing the site private sector. There may land rights issues and
Archaeological.
geophysical conditions, archaeological and the site constraints that will be historic encroachment community engagement can
Pollution. discoveries, heritage discoveries, pollution impact on the construction and issues that the Private be managed by the
Latent defects. and latent defects. The Private Partner operation of the system. Partner cannot be Contracting Authority through
may take some risk for dealing with The Contracting Authority should expected to deal with. the adoption of IFC
adverse conditions revealed by surveys also manage any indigenous Safeguards for the project,
but other unforeseeable ground risks (e.g. land rights issues that may particularly in order to ensure
archaeological risks) are likely to need to impact on the use of the site. international financing options
SIN-#7991991-v10
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Market Comparison
be held by the Contracting Authority. Prior to awarding the tender, the are available to the project.
On the other hand, the Private Partner Contracting Authority could
may be expected to address certain (through legislation and a proper
restrictive land title issues and otherwise consultation process) limit the
address the concerns of existing utilities. ability for potential land right
owners or neighbouring
properties and trades to raise
claims on the land and/or for
injurious affection.
Environmental The risk of the existing Developed X The Private Partner takes the risk of The Contracting Authority should The Contracting Authority Environmental scrutiny is
and social risk latent environmental existing environmental and other conduct the necessary due will need to take increasing even in developed
conditions affecting the conditions which the Contracting Authority diligence in order to ascertain meaningful steps both markets, as both Private
project and the has disclosed or which are discoverable the environmental fitness of the before and during the Partners and Contracting
subsequent risk of by the exercise of reasonable due site and disclose all known project to manage social Authorities have come under
damage to the diligence prior to the Private Partner environmental issues to the impacts of construction increasing burdens to develop
environment or local accepting the project route (or prior to the Private Partner. and operation. sound environmental and
communities. Private Partner obtaining an approved The Contracting Authority will be Investors and lenders social risk management plans
route), and the Contracting Authority required to review all may expect to see a plan before construction begins.
retains the risk of existing latent environmental plans put forth by to see how these aspects International lenders and
environmental and other conditions. the Private Partner, to ensure are dealt with and this development finance
Social risks, insofar as they may involve that such plans will be adequate may need to be institutions are particularly
indigenous groups, will be the to appropriately manage the contractualised. sensitive about environmental
responsibility of the Contracting Authority. risks of the project. and social risks, as a result of
their commitment to the
Equator Principles. They will
look very closely at how these
risks are managed at both
private and public sector level
and this scrutiny is helpful to
mitigate the risks posed by
these issues.
Environmental The risk of the existing Emerging X The Private Partner takes the risk of The Contracting Authority should The Contracting Authority International lenders and
and social risk latent environmental existing environmental and other conduct the necessary due will need to take development finance
conditions affecting the conditions which the Contracting Authority diligence in order to ascertain meaningful steps both institutions are particularly
project and the has disclosed or which are discoverable the environmental fitness of the before and during the sensitive about environmental
subsequent risk of by the exercise of reasonable due site and disclose all known project to manage social and social risks, as a result of
damage to the diligence prior to the Private Partner environmental issues to the impacts of construction their commitment to the
environment or local accepting the project route (or prior to the Private Partner. and operation. Equator Principles. They will
communities. Private Partner obtaining an approved The Contracting Authority will be Investors and lenders look very closely at how these
route), and the Contracting Authority required to review all may expect to see a plan risks are managed at both
retains the risk of existing latent environmental plans put forth by to see how these aspects private and public sector level
environmental and other conditions. the Private Partner, to ensure are dealt with and this and this scrutiny is helpful to
Social risks, insofar as they may involve that such plans will be adequate may need to be mitigate the risks posed by
indigenous groups, will be the to appropriately manage the contractualised. these issues.
responsibility of the Contracting Authority. risks of the project.
Design risk The risk that the project Developed X The Private Partner will have principal The Contracting Authority will Developed market
has not been designed responsibility for adequacy of the design often broadly draft the Private transmission projects benefit
SIN-#7991991-v10
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Market Comparison
adequately for the of the system and its compliance with the Partner’s design and from defined design standards
purpose required. functional and performance specifications. construction obligations to which allow for increased
Feasibility study. The Contracting Authority may retain satisfy the functional innovation and productivity
some design risk in certain aspects of the specifications and ensure gains. The quality of the
Approval of designs. compliance with applicable legal information provided by the
Changes to design. how prescriptive the Contracting Authority requirements and good industry Contracting Authority and
is in the functional specification. practice standards. This allows limited ability to verify such
for private sector innovation and data can also hinder the
If the functional specification is too efficiency gains in the design. Private Partner’s ability to
prescriptive (e.g. the required route unconditionally take full design
corridor or specified conductor or tower A design review process will
allow for increased dialogue and risk.
type constrains the efficiency of the
design) the Private Partner’s ability to cooperation between the
warrant the fitness for purpose of its Contracting Authority and the
design solution may be impacted, and the Private Partner; however the
Contracting Authority will to that extent mutual review process should
share in the design risk. not be construed as a reduction
If the project is being integrated into an Partner’s overall liability.
existing interconnected electricity
transmission system, the Private Partner’s
ability to warrant the fitness for purpose of
its design solution may be impacted (in
that it will not be able to warrant defects in
the existing interconnected electricity
transmission system that may impact
performance).
A feasibility study is relevant for most
projects. Such studies provide the design /
cost analysis to determine the viability of
the project.
Delay in approving designs Contracting
Authority risk.
change – if the original design is deficient
this will be a Private Partner risk or if the
change is required by Contracting
Authority this may be a Contracting
Authority risk.
Design risk The risk that the project Emerging X The Private Partner will have principal The Contracting Authority will
has not been designed responsibility for adequacy of the design often broadly draft the Private
adequately for the of the system and its compliance with the Partner’s design and
purpose required. functional and performance specifications. construction obligations to
Feasibility study. The Contracting Authority may retain satisfy the functional
some design risk in certain aspects of the specifications and ensure
Approval of designs. compliance with applicable legal
Changes to design. how prescriptive the Contracting Authority requirements and good industry
is in the functional specification. practice standards. This allows
for private sector innovation and
If the functional specification is too
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Market Comparison
prescriptive (e.g. the required route efficiency gains in the design.
corridor or specified conductor or tower A design review process will
type constrains the efficiency of the allow for increased dialogue and
design) the Private Partner’s ability to cooperation between the
warrant the fitness for purpose of its Contracting Authority and the
design solution may be impacted, and the Private Partner; however the
Contracting Authority will to that extent mutual review process should
share in the design risk. not be construed as a reduction
If the project is being integrated into an or limitation of the Private
existing interconnected electricity Partner’s overall liability.
transmission system, the Private Partner’s
ability to warrant the fitness for purpose of
its design solution may be impacted (in
that it will not be able to warrant defects in
the existing interconnected electricity
transmission system that may impact
performance).
A feasibility study is relevant for most
projects. Such studies provide the design /
cost analysis to determine the viability of
the project.
Delay in approving designs is a
change – if the original design is deficient
this will be a Private Partner risk or if the
change is required by Contracting
Authority this may be a Contracting
Authority risk.
Construction Labour dispute. Developed X The Private Partner assumes all These risks can be mitigated The Contracting Authority Associated risks that can
risk Interface/project construction risks. through various means, (and the lenders) will affect construction costs, such
management. The concession agreement will typically including ensuring that the have inspection, review as inflation, should also be
Commissioning address construction risk as part of the Private Partner has the requisite and approval rights in considered. The Private
damage. termination regime. experience in the sector relation to the design and Partner will generally price in
(demonstrated over a lengthy the manufacture, this risk in economies where
IP right period) and obtaining installation and erection of such risk can be projected and
breach/infringement. appropriate security to the risk of plant and materials on quantified.
Quality assurance non-performance (for example, and off the site. Turnkey construction
standards. parent company guarantees, contracts and guaranteed
performance bonds and letters completion dates, costs, and
Defective material.
of credit). performance standards are
Latent defects.
These mitigants can be often negotiated during project
Subcontractor implemented through the development.
Cost overruns where no due diligence processes and by
compensation /relief way of the security provisions in
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The concession agreement will
also include limited rights to
extend completion date, the right
to terminate if the facility is not
operational by a nominated
assumed risk) and step in rights
for the Contracting Authority.
Construction Labour dispute. Emerging X The Private Partner assumes all These risks can be mitigated The Contracting Authority In emerging markets, the
risk Interface/project construction risks. through various means, (and the lenders) will Contracting Authority often
management. The concession agreement will typically including ensuring that the have inspection, review has the right to step into the
Commissioning address construction risk as part of the Private Partner has the requisite and approval rights in project to remedy chronic or
damage. termination regime. experience in the sector relation to the design and emergency situations and also
(demonstrated over a lengthy the manufacture, to engage a replacement
IP right period) and obtaining installation and erection of contractor to rectify, remedy or
breach/infringement. appropriate security to the risk of plant and materials on address any issues, during the
Quality assurance non-performance (for example, and off the site. construction (and operation)
standards. parent company guarantees, phase.
performance bonds and letters
Defective material.
of credit).
Latent defects.
Cost overruns where no due diligence processes and by
to terminate if the facility is not
assumed risk) and step in rights
for the Contracting Authority.
Completion The risk of Developed X The Private Partner will bear principal The Contracting Authority will The Contracting Authority In developed markets,
(including delay commissioning the responsibility for delay and cost overrun usually wish to implement a may have a critical role to enforcement of construction
and cost asset on time and on risk, and will typically manage this through single-stage completion process play at stages of the deadlines and budgets may
overrun) risk budget and the the engagement of a suitable EPC for energizing the transmission construction, testing and be easier than in emerging
consequences of contractor. facilities. Financial penalties and commissioning process in markets as the Private Partner
missing either of those The principal risk to the Private Partner liquidated damages can help terms of ensuring that any will typically have more
two criteria. arising out of delay will be the loss of enforce construction deadlines. rights that it has to experience and reliable
expected revenue, the ongoing costs of The combination of (i) incentives comment on design resources, and will be more
financing construction and extended site or penalties for timely completion development and testing confident in its ability to
costs. and (ii) the implementation of a results do not adversely enforce its rights.
SIN-#7991991-v10
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The Private Partner is best placed to “longstop date” (a date which is delay the project.
integrate the construction, energization pegged to a prescribed time The Contracting Authority
and long-term operation and maintenance period after the scheduled may allow for certain relief
of the project to ensure reliable service. completion date) will create the events, delay events or
This may be managed through a single necessary tension to incentivize force majeure events
project joint venture / consortium or by the timely completion while allowing where delays or cost
Private Partner managing a series of the Private Partner a reasonable overruns have arisen from
works, supply and amount of time to meet its either the fault of the
operation/commissioning contracts. contractual responsibilities in Contracting Authority or
The Private Partner will be expected to spite of delays before the no-fault events.
demonstrate readiness for energization Contracting Authority can
terminate the project. Similarly the Contracting
before it is given permission to energize Authority may need to
and operate the facilities. take responsibility for
delays caused by the
failure of public bodies to
issue necessary consents
in good time (depending
on whether such risk has
been assumed by the
Contracting Authority or
the Private Partner).
Completion The risk of Emerging X The Private Partner will bear principal The Contracting Authority will The Contracting Authority Projects in emerging markets
(including delay commissioning the responsibility for delay and cost overrun usually wish to implement a may have a critical role to may face significant
and cost asset on time and on risk, and will typically manage this through single-stage completion process play at stages of the construction issues and the
overrun) risk budget and the the engagement of a suitable EPC for energizing the transmission construction, testing and Contracting Authority will need
consequences of contractor. facilities. Financial penalties and commissioning process in to be prepared to enforce its
missing either of those The principal risk to the Private Partner liquidated damages can help terms of ensuring that any rights to manage the
two criteria. arising out of delay will be the loss of enforce construction deadlines. rights that it has to consequences of a failure by
expected revenue, the ongoing costs of The combination of (i) incentives comment on design the Private Partner to meet
financing construction and extended site or penalties for timely completion development and testing the construction milestones. In
costs. and (ii) the implementation of a results do not adversely an emerging market context,
“longstop date” (a date which is delay the project. the dynamics may be different
The Private Partner is best placed to if the lenders have a
integrate the construction, energization pegged to a prescribed time The Contracting Authority
period after the scheduled may allow for certain relief significant underwrite of their
and long-term operation and maintenance senior debt. Ensuring a
of the project to ensure reliable service. completion date) will create the events, delay events or
necessary tension to incentivize force majeure events realistic time frame at project
This may be managed through a single out set rather than an
project joint venture / consortium or by the timely completion while allowing where delays or cost
the Private Partner a reasonable overruns have arisen from ambitious or desired time
Private Partner managing a series of frame may save time and
works, supply and amount of time to meet its either the fault of the
contractual responsibilities in Contracting Authority or money for all parties in the
operation/commissioning contracts. long run.
spite of delays before the no-fault events.
The Private Partner will be expected to Contracting Authority can
demonstrate readiness for energization Similarly the Contracting
terminate the project. Authority may need to
before it is given permission to energize
and operate the facilities. take responsibility for
delays caused by the
failure of public bodies to
issue necessary consents
in good time (depending
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on whether such risk has
been assumed by the
Contracting Authority or
the Private Partner).
price risk is able to achieve the meeting the performance and reliability Contracting Authority to draft performance indicators Contracting Authority should
performance and specifications. However, the Contracting attainable standards based on cannot be met due to have access to various data
reliability metrics and Authority is responsible for enforcing the relevant market data and policy actions by the Contracting sources to develop realistic
the price or cost of regime and for ensuring that the objectives. Performance based Authority or unforeseen and attainable performance
doing so. performance and reliability specifications on reliability and availability of circumstances, the specifications and models.
Damage pollution are properly tailored to what the Private service can be measured Private Partner may be
accidents. Partner can deliver. Consideration needs against pre-determined eligible to seek relief or
to be given to the ability of the Private schedules or standards. compensation.
Meeting handback Partner to achieve the necessary
requirements. performance and reliability levels, and the
Health and safety appropriateness of the metrics given the
Vandalism. nature of the project.
Equipment becoming During the concession period, the Private
prematurely obsolete. Partner will retain care custody and
control of the transmission facility and
Expansion.
primarily bears the risks associated with
damage, pollution, accidents, meeting the
handback requirements, health and
safety, and vandalism.
Since power transmission projects are
availability-based, the Contracting
Authority will primarily bear the risk of the
transmission system operating
characteristics exceeding the design
parameters of the project.
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 and reliability require the Contracting Authority performance indicators particularly in the case of
performance and specifications. However, the Contracting to reduce the performance cannot be met due to market first projects, the
reliability metrics and Authority is responsible for enforcing the requirements during the settling actions by the Contracting preparation of attainable
the price or cost of regime and for ensuring that the in period and possibly readjust Authority or unforeseen standards by the Contracting
doing so. performance and reliability specifications the performance metrics once circumstances, the Authority may be complicated
Damage Pollution are properly tailored to what the Private the performance of the system, Private Partner may be by the lack of outage and
Accidents. Partner can deliver. Consideration needs as integrated into the existing eligible to seek relief or performance data pertaining
to be given to the ability of the Private system, is better understood. compensation. to the interconnected system.
Meeting handback Partner to achieve the necessary This would mitigate the risk of
requirements performance and reliability levels, and the long-term performance failure.
Health and Safety appropriateness of the metrics given the
Vandalism. nature of the project.
Equipment becoming During the concession period, the Private
prematurely obsolete. Partner will retain care custody and
control of the transmission facility and
Expansion.
primarily bears the risks associated with
damage, pollution, accidents, meeting the
SIN-#7991991-v10
Government Support
Market Comparison
handback requirements, health and
safety, and vandalism.
Since power transmission projects are
availability-based, the Contracting
Authority will primarily bear the risk of the
transmission system operating
characteristics exceeding the design
parameters of the project.
Resource or The risk that the supply Developed X The Private Partner bears the principal N/A The Contracting Authority Developed markets generally
input risk of inputs or resources responsibility to ensure an uninterrupted is not expected to assist do not experience market
required for the supply of inputs/resources for the project the Private Partner in volatility to the extent of
operation of the project and to manage the costs of those inputs. mitigating such risks. emerging markets, and
is interrupted or the resource availability is less of
cost increases. a concern.
Resource or The risk that the supply Emerging X The Private Partner bears the principal N/A The Contracting Authority Emerging markets are
input risk of inputs or resources responsibility to ensure an uninterrupted may need to stand behind generally more susceptible
required for the supply of inputs/resources for the project the cost risk for certain than developed markets to
operation of the project and to manage the costs of those inputs. inputs, or at least market volatility and major
is interrupted or the There may be specific instances where underwrite the Private cost variations, and resource
cost increases. the Private Partner may need the share Partner’s financing for availability is more of a
this risk with the Contracting Authority, these costs. concern.
such as reliance on local source materials
where these may be affected by labour
disputes, embargos or other political risks.
Demand risk Market participant Developed X The default position for transmission As it will be absorbing this As the Contracting In developed markets, the
demand for the projects is for the Contracting Authority to demand risk, the Contracting Authority will be retaining Contracting Authority should
transmission facility retain all demand risk. Authority should do a full demand risk, it will need have access to various data
capacity. assessment of demand risks. to ensure that it is sources to develop realistic
comfortable (both demand and load forecasts.
politically and
economically) with
demand forecasts.
Demand risk Market participant Emerging X The default position for transmission As it will be absorbing this As the Contracting It may be difficult for
demand for the projects is for the Contracting Authority to demand risk, the Contracting Authority will be retaining Contracting Authorities to
transmission facility retain all demand risk. Authority should do a full demand risk, it will need develop realistic demand and
capacity. assessment of demand risks. to ensure that it is load forecasts, as there is
comfortable (both likely to be a lack of relevant
politically and comparative market data to
economically) with begin with.
demand forecasts.
appropriate standards standards regarding maintenance as set maintenance requirements undue interference with Partner in the operation,
and specifications for out in the maintenance requirements properly define the maintenance the Private Partner’s maintenance and
the life of the project. defined by the Contracting Authority. obligations on the Private provision of maintenance rehabilitation of the project
SIN-#7991991-v10
Government Support
Market Comparison
costs due to increased the overall risk of periodic and system remains robust in the (with the exception of incentivizing greater care and
Incorrect estimates and maintenance work, work stemming from expiry of the agreement. services) reduces the Partner in the construction
cost overruns. design or construction errors and The primary role of the benefits of the BOOT phase, and increasing the
rehabilitation work. Contracting Authority is to project model. useful life of the infrastructure.
That being said, the Contracting Authority properly define the maintenance The Contracting Authority
may retain some maintenance risk where requirements and level of may be required to
the load (e.g. on a transformer) materially services required of the Private guarantee and manage
exceeds the projections of the Contracting Partner. the maintenance of the
Authority. Adequate performance by the existing interconnected
The Private Partner will also retain the Private Partner can be further transmission system.
principal risk with regard to incorrect enforced by ensuring that the
estimates and cost overruns. payment mechanism considers
The Contracting Authority should consider quality and service failures. The
including appropriate KPIs to monitor the Contracting Authority will be
service levels and take effective allowed to adjust payment to the
enforcement action (e.g. through penalties Private Partner based on
or reduced availability payments). meeting or failing to meet certain
The Contracting Authority will generally may also be other remedies
retain the risk associated with outages such as warning notices and
(and related maintenance) caused by right to replace subcontractors.
other transmission facilities which are part
of the same interconnected electric The Private Partner can manage
system. the maintenance risk by passing
such risks to contractors through
long term maintenance contracts
which cover planned and
unplanned maintenance, with
adequate compensation regimes
for underperformance / lack of
availability of the asset.
Maintenance The risk of maintaining Emerging X The Private Partner will have principal The Contracting Authority should Generally speaking, the
risk the asset to the responsibility for meeting the appropriate take time to ensure that the Contracting Authority’s
appropriate standards standards regarding maintenance as set maintenance requirements undue interference with
and specifications for out in the maintenance requirements properly define the maintenance the Private Partner’s
the life of the project. defined by the Contracting Authority. obligations on the Private provision of maintenance
Increased maintenance The Private Partner generally assumes Partner to ensure that the and rehabilitation services
costs due to increased the overall risk of periodic and system remains robust in the (with the exception of
volumes. preventative maintenance, emergency event of early termination or minor management
maintenance work, work stemming from expiry of the agreement. services) reduces the
Incorrect estimates and benefits of the BOOT
cost overruns. design or construction errors and The primary role of the
rehabilitation work. Contracting Authority is to project model.
That being said, the Contracting Authority properly define the maintenance The Contracting Authority
may retain some maintenance risk where requirements and level of may be required to
the load (e.g. on a transformer) materially services required of the Private guarantee and manage
exceeds the projections of the Contracting Partner. the maintenance of the
Authority. Adequate performance by the existing interconnected
Private Partner can be further transmission system.
SIN-#7991991-v10
Government Support
Market Comparison
The Private Partner will also retain the enforced by ensuring that the
principal risk with regard to incorrect payment mechanism considers
estimates and cost overruns. quality and service failures. The
The Contracting Authority should consider Contracting Authority will be
including appropriate KPIs to monitor the allowed to adjust payment to the
service levels and take effective Private Partner based on
enforcement action (e.g. through penalties meeting or failing to meet certain
or reduced availability payments). performance standards. There
The Contracting Authority will generally such as warning notices and
retain the risk associated with outages right to replace subcontractors.
(and related maintenance) caused by
other transmission facilities which are part The Private Partner can manage
of the same interconnected electric the maintenance risk by passing
system. such risks to contractors through
long term maintenance contracts
which cover planned and
unplanned maintenance, with
adequate compensation regimes
for underperformance / lack of
availability of the asset.
Force majeure The risk that Developed X Force majeure is a shared risk and there Project insurance (physical Generally speaking, In developed market
risk unexpected events will be a fairly well developed list of events damage and loss of revenue where performance is transactions, the Contracting
occur that are beyond that entitles the Private Partner to relief. coverage) is the key mitigant for suspended or materially Authority typically
the control of the Typical events include (i) war, armed force majeure risks that cause impacted during an event compensates the Private
parties and delay or conflict, terrorism or acts of foreign physical damage. of force majeure, an Partner, only for its
prohibit performance. enemies; (ii) nuclear or radioactive The risk of disruption as a result amount of compensation outstanding debt (but not for
contamination; (iii) chemical or biological of no-fault events may be should continue to be its expected rate of return) for
contamination; or (iv) pressure waves mitigated by relaxing the payable by the termination arising from force
caused by devices traveling at supersonic performance thresholds (e.g. Contracting Authority to majeure.
speeds. requiring a lower level of the Private Partner in
acceptable service, which then order to service the
Force majeure events occurring during Private Partner’s debt
construction will also cause a delay in allows the Private Partner to
take the risk of a certain number obligations during the
revenue commencement. The ability of course of the event.
the Private Partner to bear this risk for of day-to-day adverse events
typical to a project of this nature Where the project is
uninsured risks will be limited, and the terminated, the
Contracting Authority will typically have to but without incurring
performance penalties). Contracting Authority may
bear the risk after a certain period of time be required to fully
or level of cost has been exceeded. compensate the Private
The Private Partner’s relief in respect of Partner for debt owed to
force majeure events occurring during the lenders. Whether the
operation will, in most instances, include debt will be kept whole in
relief from KPI penalties. such a scenario, will be a
key area of focus for
assessments.
Force majeure The risk that Emerging X Force majeure is a shared risk and there Project insurance (physical Generally speaking, In emerging market
unexpected events will be a fairly well developed list of events damage and loss of revenue where performance is transactions, the Contracting
SIN-#7991991-v10
Government Support
Market Comparison
risk occur that are beyond that entitles the Private Partner to relief. coverage) is the key mitigant for suspended or materially Authority may not provide any
the control of the Typical events include (i) war, armed force majeure risks that cause impacted during an event compensation for termination
parties and delay or conflict, terrorism or acts of foreign physical damage. of force majeure, an arising from a “natural” force
prohibit performance. enemies; (ii) nuclear or radioactive The risk of disruption as a result amount of compensation majeure, on the grounds that
contamination; (iii) chemical or biological of no-fault events may be should continue to be this should be insured. If this
contamination; or (iv) pressure waves mitigated by relaxing the payable by the is the case then unavailability
caused by devices traveling at supersonic performance thresholds (e.g. Contracting Authority to of insurance will need to be
speeds. requiring a lower level of the Private Partner in adequately addressed.
acceptable service, which then order to service the Other markets may provide
Force majeure events occurring during Private Partner’s debt
construction will also cause a delay in allows the Private Partner to limited cover to compensate
take the risk of a certain number obligations during the senior debt.
revenue commencement. The ability of course of the event.
the Private Partner to bear this risk for of day-to-day adverse events
typical to a project of this nature Where the project is
uninsured risks will be limited, and the terminated, the
Contracting Authority will typically have to but without incurring
performance penalties). Contracting Authority may
bear the risk after a certain period of time be required to fully
or level of cost has been exceeded. compensate the Private
The Private Partner’s relief in respect of Partner for debt owed to
force majeure events occurring during the lenders. Whether the
operation will, in most instances, include debt will be kept whole in
relief from KPI penalties. such a scenario, will be a
key area of focus for
assessments.
market. Contracting Authority to
provide support.
Exchange and The risk of currency Emerging X The Private Partner would look to mitigate Exchange and interest rates The Contracting Authority In emerging market projects,
interest rate risk fluctuations and or the this risk through hedging arrangements risks are typically not accounted is not expected to assist the devaluation of local
interest rate over the under the Finance Documents, to the for beyond the Private Partner’s the Private Partner in currency beyond a certain
life of a project extent possible or necessary in that own hedging arrangements. mitigating such risks but threshold may be a trigger for
market. currency repatriation non-default termination.
In certain countries this may not be guarantees may be Alternatively it could trigger a
possible due to exchange / interest rate sought in some markets. “cap and collar” subsidy
volatility. arrangement from the
Contracting Authority. Issues
of convertibility of currency
and restrictions on repatriation
of funds are also bankability
issues upon termination in
emerging markets. Some
aspects of local currency
payment may also be tied to
foreign currency exposure.
Many emerging markets will
SIN-#7991991-v10
Government Support
Market Comparison
offer limited protection.
Insurance risk The risk that insurance Developed X Where risks become uninsurable there is As part of the feasibility study The Contracting Authority
for particular risks is or typically no obligation to maintain the Contracting Authority and may need to consider
becomes unavailable. insurance for such risks, and since neither Private Partner should consider whether it stands behind
party can better control the risk of whether insurance might unavailability of
insurance coverage becoming become unavailable for the insurance, in particular
unattainable, this is typically a shared risk. project given the location and where this has been
Where the cost of the required insurance other relevant factors. caused by in-country or
increases significantly, the risk is typically regional events or
shared by either having an agreed cost circumstances.
escalation mechanism up to ceiling or a
percentage sharing arrangement - this
allows the Contracting Authority to
quantify the contingency that has been
priced for this risk.
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 In emerging market
becomes unavailable. insurance for such risks, and since neither Private Partner should consider whether it stands behind Authority typically does not
party can better control the risk of whether insurance might unavailability of take the risk of uninsurability
insurance coverage becoming become unavailable for the insurance, in particular arising on the project,
unattainable, this is typically a shared risk. project given the location and where this has been although there are good
Where the cost of the required insurance other relevant factors. caused by in-country or grounds to say that it should
increases significantly, the risk is typically regional events or do so if the Private Partner
shared by either having an agreed cost circumstances. has no protection for the
escalation mechanism up to ceiling or a consequences of a natural
percentage sharing arrangement - this force majeure that becomes
allows the Contracting Authority to uninsurable especially if
quantify the contingency that has been Contracting Authority wishes
priced for this risk. for the project to continue.
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.
or expropriation of the Contracting Authority will be responsible events and/or excusing causes the Contracting Authority subdued and less drastic than
SIN-#7991991-v10
Government Support
Market Comparison
project. should all or a portion of the project be (relief from payment deductions) will need to stand behind in emerging markets. As such,
Public sector seized or expropriated. that involve a breach of debt and equity. political risk insurance is not
budgeting. The Contracting Authority will be obligations or interference by the typically obtained.
responsible to provide availability Contracting Authority with the
payments regardless of changes in public project.
sector budgeting.
Political risk The risk of Government Emerging X The Contracting Authority should bear The Contracting Authority will This type of issue will In emerging markets,
intervention, responsibility for political events outside outline certain political events as typically lead to a investors and commercial
discrimination, seizure the Private Partner’s control, and the delay events, compensation termination event where lenders may also be able to
or expropriation of the Contracting Authority will be responsible events and/or excusing causes the Contracting Authority cover themselves by use of
project. should all or a portion of the project be (relief from payment deductions) will need to stand behind political risk insurance, leaving
Public sector seized or expropriated. that involve a breach of debt and equity. this risk to be managed by the
budgeting. The Contracting Authority will be obligations or interference by the insurer against the
responsible to provide availability Contracting Authority with the Contracting Authority.
payments regardless of changes in public project. It can take some
sector budgeting. Contracting Authorities time to
understand and accept this risk
as they may not see themselves
as a ‘Government entity’ that can
manage this risk itself but it is a
question of risk allocation.
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 In developed markets, the
ge 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 price manner: provisions (on the basis that the Private Partner to Changes and likely will have
at which compliance The Private Partner will be kept whole in general changes in law will affect assume, and price for, a less protection than in
with law can be respect of changes in law which: (i) are the market equally and should specified level of general emerging countries where
maintained. discriminatory to the project or the Private be reflected in general inflation). change in law capex risk Contracting Authority will be
Change in taxation. Partner (ii) are specific to the transmission Some projects only permit the during the operational expected to bear a significant
sector or public-private partnership Private Partner to claim relief for period, before portion of the change in law
transactions, (iii) affect occupational general changes in law occurring compensation would be risk in order to attract private
health and safety requirements applicable after completion of construction. paid. The UK Government investment. Such risk may be
the construction or operation and This approach may be justified if ultimately decided that heightened in jurisdictions
maintenance of transmission facilities or the country's legal regime this allocation did not where the PPP legislation
(iv) affect value added, sales or other ensures that the prevailing legal represent value for money allows for a local assembly to
taxes, other than taxes on income or regime at the start of and reversed this veto the project.
capital. A change in law is often subject to construction is fixed until the position. Some countries
a de minimis threshold before the Private works are complete (i.e. does which adopted the SOPC
Partner is entitled to compensation not operate retrospectively to model had already taken
projects in progress). this approach.
The Private Partner will not be Accordingly the
compensated for general changes in law Contracting Authority
that only affect operational expenditure or should be mindful of how
taxation (i.e. affect the market equally). it will fund these changes
Changes in law will always entitle the should they arise.
obligation. If this cannot be achieved the
Private Partner will typically be entitled to
SIN-#7991991-v10
Government Support
Market Comparison
terminate as if a Contracting Authority
Regulatory/chan The risk of law Emerging X The risk of change in law sits mostly with Change in law risk that is Past concession models In emerging markets, the
ge in law risk changing and affecting the Contracting Authority but there will be retained by the Private Partner (including that developed Private Partner is likely to
the ability of the project a degree of risk sharing in the following may be mitigated by indexation in the UK) used to require have a greater level of
to perform and the price manner: provisions (on the basis that the Private Partner to protection from changes in law
at which compliance The Private Partner will be kept whole in general changes in law will affect assume, and price for, a than in developed markets, to
with law can be respect of changes in law which: (i) are the market equally and should specified level of general reflect the greater risk of
maintained. discriminatory to the project or the Private be reflected in general inflation). change in law capex risk change (including both
Change in taxation. Partner (ii) are specific to the transmission Some projects only permit the during the operational likelihood and consequences)
sector or public-private partnership Private Partner to claim relief for period, before and in order to attract
transactions, (iii) affect occupational general changes in law occurring compensation would be investors to the project. In that
health and safety requirements applicable after completion of construction. paid. The UK Government way, the Contracting Authority
the construction or operation and This approach may be justified if ultimately decided that would be expected to assume
maintenance of transmission facilities or the country's legal regime this allocation did not more change in law risk than
(iv) affect value added, sales or other ensures that the prevailing legal represent value for money compared to a project in a
taxes, other than taxes on income or regime at the start of and reversed this developed market.
capital. A change in law is often subject to construction is fixed until the position. Some countries
a de minimis threshold before the Private works are complete (i.e. does which adopted the SOPC
Partner is entitled to compensation not operate retrospectively to model had already taken
projects in progress). this approach.
The Private Partner will not be Accordingly the
compensated for general changes in law Contracting Authority
that only affect operational expenditure or should be mindful of how
taxation (i.e. affect the market equally). it will fund these changes
Changes in law will always entitle the should they arise.
necessary to avoid an impossible Some projects may also
obligation. If this cannot be achieved the require a stabilisation
Private Partner will typically be entitled to clause that entrenches
terminate as if a Contracting Authority certain legal positions
breach had occurred. (such as the current tax
regime) against any future
changes in law. This may
require a level of
parliamentary ratification
of the concession
agreement.
However, the stabilisation
method is generally not
favoured by Governments
or NGOs (e.g. because of
the concept of Private
Partner immunity from
updates to environmental
laws, for example).
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, inflation
of the project increase typically borne by the Private Partner, Private Partner will look to be may account for inflation is typically minimal and does
more than expected. while inflation risks during the concession kept neutral in respect of both costs by incorporating the not experience fluctuations to
SIN-#7991991-v10
Government Support
Market Comparison
term will typically be primarily borne by the international and local consumer price index into the extent of emerging
Contracting Authority. inflationary costs through an the monthly payments. markets.
During the concession term, the appropriate inflation uplift or tariff
availability payment will typically include adjustment regime.
that will include an escalation factor that
Inflation risk The risk that the costs Emerging X Inflation risks during construction are During the concession term, the The payment mechanism The fluctuation of inflationary
of the project increase typically borne by the Private Partner, Private Partner will look to be may account for inflation costs is a greater risk in
more than expected. while inflation risks during the concession kept neutral in respect of both costs by incorporating the emerging markets than it is in
term will typically be primarily borne by the international and local consumer price index into developed markets and the
Contracting Authority. inflationary costs through an the monthly payments. Private Partner’s expectation
During the concession term, the appropriate inflation uplift or tariff will be that this risk is borne
availability payment will typically include adjustment regime. and managed by the
both a fixed component (where debt has Contracting Authority during
been hedged) and a variable component the concession term.
that will include an escalation factor that
Conflicts of interest awarded remains involved during change shareholding for a period certainty of involvement of key
between shareholders construction and a specified period during (i.e. lock-in for the construction participants will need to be
of Private Partner. operation. period and for a minimum period balanced with the private
Bid awarded on basis of Private Partner’s of time thereafter, e.g. two years sector’s requirements for
technical expertise and financial resources post energization). flexibility in future business
therefore sponsors should remain Pre-tender proposal should set plans, particularly in the equity
involved. out proposals for governance of investor markets.
Private Partner.
Strategic risk Change in shareholding Emerging X Contracting Authority wants to ensure that Contracting Authority will limit In emerging markets lock-in
of Private Partner. the Private Partner to whom the project is Private Partner’s ability to periods and subsequent
Conflicts of interest awarded remains involved during change shareholding for a period controls are typically more
between shareholders construction and a specified period during (i.e. lock-in for the construction restrictive than in developed
of Private Partner. operation. period and for a minimum period markets.
Bid awarded on basis of Private Partner’s of time thereafter, e.g. two years
technical expertise and financial resources post energization).
therefore sponsors should remain Pre-tender proposal should set
involved. out proposals for governance of
Private Partner.
Disruptive The risk that a new Developed X Contracting Authority bears the risk of The Contracting Authority will Typically not dealt with.
technology risk emerging technology obsolescence. need to be cognisant of potential
unexpectedly displaces disruptive technologies, such as
an established battery storage and off-grid
technology used in developments, that may impact
SIN-#7991991-v10
Government Support
Market Comparison
power transmission long term demand for the asset.
sector.
Disruptive The risk that a new Emerging X Contracting Authority bears the risk of The Contracting Authority will Typically not dealt with.
technology risk emerging technology obsolescence. need to be cognisant of potential
unexpectedly displaces disruptive technologies, such as
an established battery storage and off-grid
technology used in developments, that may impact
power transmission long term demand for the asset.
sector.
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 In developed markets, early
termination being terminated before early termination will depend on the the termination triggers are not direct agreements/tri- termination compensation is
(including any the expiry of time and reasons for termination and typically for: hair triggers and that there are partite agreements with well defined and political risk
compensation) the monetary (1) Contracting Authority default – the adequate well-defined routes for the Contracting Authority insurance is not typically
risk consequences of such Private Partner would get the return of each party to remedy any giving the lenders step-in obtained due to a lesser risk
termination senior debt and equity (including junior alleged default. rights in the case of the of the Contracting Authority
debt) and a level of return on equity; Contracting Authority defaulting on its payment
calling a default obligations.
Partner would get the return of senior debt of the Private Partner
and equity (including junior debt); and being in default under the
termination rights.
SIN-#7991991-v10
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Market Comparison
Early The risk of a project Emerging X The level of compensation payable on A key mitigant is to make sure The lenders will require There may be sovereign
termination being terminated before early termination will depend on the the termination triggers are not direct agreements/tri- guarantees in emerging
(including any the expiry of time and reasons for termination and typically for: hair triggers and that there are partite agreements with markets which support the
compensation) the monetary (1) Contracting Authority default – the adequate well-defined routes for the Contracting Authority Contracting Authorities
risk consequences of such Private Partner would get the return of each party to remedy any giving the lenders step-in payment obligations.
termination senior debt and equity (including junior alleged default. rights in the case of the
debt) and a level of return on equity; Contracting Authority
calling a default
Partner would get the return of senior debt of the Private Partner
and equity (including junior debt); and being in default under the
entitled to the amount that a new private The covenant risk of the
partner would pay for the remaining term Contracting Authority may
of the concession, less any costs incurred require a guarantee from
by the Contracting Authority during the a higher level of
retendering process. Government to guarantee
It is common for the senior debt to be the level of compensation
guaranteed as a minimum in every payable on termination.
termination rights.
SIN-#7991991-v10
Risk Matrix 9: Natural gas distribution project (ROT) 178
Risk Matrix 9: Natural gas distribution (ROT)

 Natural gas distribution project involving an existing distribution network for an existing utility, as a ROT project where the wholesale supplier of gas is state owned
and gas tariffs are set by a regulator
 Assumes that the Contracting Authority identifies the site on which the project will be built
 Key risks:

SIN-#7991991-v10
Government Support
Market Comparison
Land purchase The risk of acquiring Developed X The Contracting Authority bears the The Contracting Authority should The Contracting Authority Land and access rights and
and site risk title to the land to be principal risk for ensuring that the required undertake detailed ground, may need to use its ground conditions in
used for a project, the land interests in the sites designated for environmental and social legislative powers to developed markets are
selection of that site the project are within its ownership or assessments and should obtain and then secure typically more established and
and the geophysical control, or that it has sufficient legal rights disclose such information to the the sites and easements risks can be mitigated with
and hydrological (contractual or statutory) over them to Private Partner as part of the (e.g. through appropriate due diligence with
conditions of that site. enable this to occur. bidding process. expropriation / relevant land registries and
Planning permission. The land interests may be provided by the The Contracting Authority should compulsory acquisition). utility records. Where there
Contracting Authority to the Private also undertake detailed site Even where there is a are deficiencies, these can
Access rights. often be easily cured through
Partner, if it has or has acquired the surveys to identify the location of legally clear site,
Security. relevant land rights (through contract or the existing assets and to Government enforcement the exercise of statutory
statute), or a third party landowner who confirm, or otherwise, that the powers may be needed to powers for acquisition and
Heritage.
has agreed to grant the relevant land existing assets are located on properly secure the site access.
Archaeological.
rights. As the project will be transferred to the sites and within the for the project. There may The Private Partner’s
Pollution. the Contracting Authority at the end of the easements that it owns or be historic encroachment obligations with regards to
Latent defects. agreed term, the land rights are usually controls. issues that the Private indigenous rights are
granted to the project under lease or The Contracting Authority should Partner cannot be generally well legislated in
similar arrangements. allow access to the Private expected to deal with. developed markets, for
Additionally, the Contracting Authority Partner during the bidding This may particularly be example the requirement to
bears the principal risk of ensuring that the process to carry out its own the case in relation to the enter into indigenous land use
existing assets are located on the sites surveys of the sites and the pipe network. agreements under native title
and within the easements that it owns or existing assets. If the existing network has legislation in Australia and the
controls. transported other fuels equivalent under first nations
The Contracting Authority law in Canada.
The Private Partner will be responsible for should, to the greatest extent this may increase the
assessing the adequacy of the sites possible, ensure that it has a need for the Contracting In some cases the Contracting
designated by the Contracting Authority complete understanding of the Authority to take the risk Authority may seek to pass
and the land rights granted (including any risks involved in securing the site of remediation and delays the risk of contamination along
associated easements and access rights) and the site constraints that may to completion of the ROT the existing route to the
and any restraints that the designated impact on the rehabilitation and project. Private Partner.
sites may impose on the design and operation of the facility. This
construction of the rehabilitation works. includes third party interference,
This will be particularly important in whether accidental or wilful, to
relation to obtaining access to the gas the pipe network.
distribution network, including temporary The Contracting Authority should
occupation of sites for maintenance and also manage any indigenous
laydown areas. Consideration should also land rights issues that may
be given to the need for additional gas impact on the use of the site.
compression facilities along the route.
As this is a ROT project the risks
The Contracting Authority would generally may be mitigated because the
be responsible for pre-existing project involves an existing
contamination, archaeological finds or distribution network.
fossils and man-made substructures, to
the extent not already known or revealed
by site surveys, either by dealing with
such finds or providing relief for the
impacts on the project. This would include
any pre-existing claims for contamination
or compliance with environmental laws
SIN-#7991991-v10
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Market Comparison
and standards.
The Contracting Authority would also
generally be responsible for compliance
with planning and environmental laws and
approvals as at the commencement of the
term.
The Contracting Authority may also accept
responsibility for unknown geotechnical
conditions although this may be limited to
certain types of conditions and will be
restricted to conditions that were not
reasonably foreseeable based on site
surveys performed by the Contracting
Party.
The Private Partner may be required to
perform its own site surveys to provide a
baseline report to demonstrate pre-
existing site conditions.
The Private Partner may be expected to
satisfy itself as to the status of any
existing assets proposed to be used in the
project or of any existing assets which
have been identified and required to be
removed or relocated.
Where it is not possible to fully survey
prior to award and/or conduct due
diligence, risk will be allocated to the
Contracting Authority or shared.
Land purchase The risk of acquiring Emerging X The Contracting Authority bears the The Contracting Authority should The Contracting Authority Land and access rights and
and site risk title to the land to be principal risk for ensuring that the required undertake detailed ground, may need to use its ground conditions (in
used for a project, the land interests in the sites designated for environmental and social legislative powers to particular reliable utilities
selection of that site the project are within its ownership or assessments and should obtain and then secure records, and land charges) in
and the geophysical control, or that it has sufficient legal rights disclose such information to the the sites and easements emerging markets may be
conditions of that site. (contractual or statutory) over them to Private Partner as part of the (e.g. through less certain than in developed
Planning permission. enable this to occur. bidding process. expropriation / markets where established
The land interests may be provided by the The Contracting Authority should compulsory acquisition). land registries and utility
Access rights. records exist. Lenders and
Contracting Authority to the Private also undertake detailed site Even where there is a
Security. Partner, if it has or has acquired the surveys to identify the location of legally clear site, sponsors often have to
relevant land rights (through contract or the existing assets and to Government enforcement become comfortable with
Heritage.
statute), or a third party landowner who confirm, or otherwise, that the powers may be needed to wholly contractual land rights
Archaeological. (which may be registered only
has agreed to grant the relevant land existing assets are located on properly secure the site
Pollution. rights. As the project will be transferred to the sites and within the for the project. There may through a notarisation
the Contracting Authority at the end of the easements that it owns or be historic encroachment process).
Latent defects.
agreed term, the land rights are usually controls. issues that the Private In the absence of legislation in
granted to the project under lease or The Contracting Authority should Partner cannot be emerging markets, indigenous
similar arrangements. allow access to the Private expected to deal with. land rights issues and
Additionally, the Contracting Party bears Partner during the bidding This may particularly be community engagement can
SIN-#7991991-v10
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Market Comparison
the principal risk of ensuring that the process to carry out its own the case in relation to the be managed by the
existing assets are located on the sites surveys of the sites and the pipe network. Contracting Authority through
and within the easements that it owns or existing assets. If the existing network has the adoption of IFC
controls. The Contracting Authority transported other fuels Safeguards for the project,
The Private Partner will be responsible for should, to the greatest extent this may increase the particularly in order to ensure
assessing the adequacy of the sites possible, ensure that it has a need for the Contracting international financing options
designated by the Contracting Authority complete understanding of the Authority to take the risk are available to the project.
and the land rights granted (including any risks involved in securing the site of remediation and delays
associated easements and access rights) and the site constraints that may to completion of the ROT
and any restraints that the designated impact on the rehabilitation and project.
sites may impose on the design and operation of the facility. This
construction of the rehabilitation works. includes third party interference,
relation to obtaining access to the gas the pipe network.
distribution network, including temporary As this is a ROT project the risks
occupation of sites for maintenance and may be mitigated because the
laydown areas. Consideration should also project involves an existing
be given to the need for additional gas distribution network.
compression facilities along the route.
be responsible for pre-existing
contamination, archaeological finds or
impacts on the project. This would include
any pre-existing claims for contamination
or compliance with environmental laws
and standards.
term.
surveys performed the Contracting Party..
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and social risk latent environmental responsibility to accept the project site and conduct the necessary due will need to take increasing even in developed
conditions affecting the existing assets in an “as is” condition, diligence in order to ascertain meaningful steps both markets, as both Private
project and the subject to the Contracting Authority’s the environmental fitness of the before and during the Partners and Contracting
subsequent risk of disclosure of relevant matters, and site and existing assets and project to manage social Authorities have come under
damage to the manage the environmental, public health disclose all known environmental impacts of construction increasing burdens to develop
environment or local and social strategy across the project, as issues to the Private Partner. and operation. sound environmental, public
communities well as obtaining and maintaining all The Contracting Authority may Investors and lenders health and social risk
required licenses, permits and review all environmental plans may expect to see a plan management plans before
authorisations as necessary. put forward by the Private to see how these aspects construction begins. For
Existing environmental risks of the site Partner, to ensure that such are dealt with. example, in Australia the
prior to the Private Partner’s acceptance plans will be adequate to requirement for such plans is
of the site that have not been disclosed or appropriately manage the risks required by legislation.
could not have been known by the Private of the project. Lenders are particularly
Partner prior to commercial close may be sensitive about environmental
deemed to be the responsibility of the and social risks, as a result of
Contracting Authority. See comments on their commitment to the
“Land purchase and site risk” for a gas Equator Principles. They will
distribution project in developed markets. look very closely at how these
Social risks, insofar as they may involve risks are managed at both
indigenous groups, may be the private and public sector level
responsibility of the Contracting Authority and this scrutiny is helpful to
but are often borne by the Private Partner. mitigate the risks posed by
these issues.
Environmental The risk of the existing Emerging X The Private Partner will have primary The Contracting Authority should The Contracting Authority International lenders and
and social risk latent environmental responsibility to manage the conduct the necessary initial due will need to take development finance
conditions affecting the environmental, public health and social diligence in order to ascertain meaningful steps both institutions are particularly
project and the strategy across the project, however the environmental fitness of the before and during the sensitive about environmental
subsequent risk of existing environmental conditions will site and disclose all known project to manage social and social risks, as a result of
damage to the usually to be retained by the Contracting environmental issues to the impacts of construction their commitment to the
environment or local Authority. Private Partner. and operation. Equator Principles. They will
communities Investors and lenders look very closely at how these
may expect to see a plan risks are managed at both
to see how these aspects private and public sector level
are dealt with. and this scrutiny is helpful to
these issues.
Design risk The risk that the project Developed X The Private Partner will have principal The Contracting Authority will The Contracting Developed market gas
has not been designed responsibility for the adequacy of the generally provide minimum Authority’s role may be distribution projects benefit
adequately for the design of the rehabilitation works and its functional / performance limited to review of the from stable resource
purpose required. compliance with the functional / specifications and require design to ensure that the availability, robust regulatory
Feasibility study. performance specification provided by the compliance with applicable legal minimum functional / regimes and defined design
Contracting Authority. requirements and good industry performance standards which allow for
Approval of designs. practice standards. This allows specifications will be able increased innovation and
SIN-#7991991-v10
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Market Comparison
Changes to design. The Contracting Authority will retain the for private sector innovation and to be met. This review will efficiency gains.
Access to necessary design risk to the extent that the design is efficiency gains in the detailed not be an approval, It is common for such projects
historic information dependent on interconnections for which design. In the context of a gas however, and will not limit to attract high levels of
(such as existing plans the Contracting Authority retains distribution project in an existing the liability of the Private competition from private
or data) responsibility, such as the connection network it is critical that the Partner. sector investors seeking to
points and gas quantity and quality. In design complies with the Gas invest in regulated assets.
some cases, the Contracting Authority will Code, local and international Private Partners and lenders
retain the risks associated with the quality standards as to will generally regard the risks
condition of the existing assets as at the equipment and in particular associated with a ROT project
commencement of the term and in other pipeline. It must also be fully as low compared to greenfield
cases this risk will be allocated to the compatible with the other parts projects.
Private Partner. of the network.
The Contracting Authority should
take time to ensure that the
minimum functional /
performance specifications will
provide a facility that will meet
the Contracting Authority’s
expectations on transfer of the
facility to the Contracting
Authority at the end of the term.
A design review process will
allow for the Contracting
Authority to review and comment
on the Private Partner’s detailed
design; however, the review
process should not be construed
as a reduction or limitation of the
Private Partner’s overall liability
(for example, by way of approval
by the Contracting Authority) or
its general freedom provided that
the minimum functional /
performance specifications are
met.
Design risk The risk that the project Emerging X The Private Partner will have principal The Contracting Authority will The Contracting The quality of information
has not been designed responsibility for the adequacy of the generally provide minimum Authority’s role will be provided by the Contracting
adequately for the design of the rehabilitation works and its functional / performance limited to review of the Authority and limited ability to
purpose required. compliance with the functional / specifications and require design to ensure that the verify that data may hinder the
Feasibility study. performance specification provided by the compliance with applicable legal minimum functional / Private Partner’s ability to
Contracting Authority. requirements and good industry performance assume risks which would be
Approval of designs. practice standards. This allows specifications will be able applicable in developed
The Contracting Authority will retain the
Changes to design. design risk to the extent that the design is for private sector innovation and to be met. markets.
dependent on interconnections for which efficiency gains in the detailed It is common for such projects
Access to necessary
the Contracting Authority retains design. In the context of a gas to attract high levels of
historic information
responsibility, such as the connection distribution project in an existing competition from private
(such as existing plans
points and gas quantity and quality. In network it is critical that the sector investors seeking to
or data)
some cases, the Contracting Authority will design complies with the Gas invest in regulated assets.
retain the risks associated with the Code, local and international Private Partners and lenders
SIN-#7991991-v10
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Market Comparison
condition of the existing assets as at the quality standards as to will generally regard the risks
commencement of the term. equipment and in particular associated with a ROT project
pipeline. It must also be fully as low compared to greenfield
compatible with the other parts projects.
of the network.
The Contracting Authority should
take time to ensure that the
minimum functional /
met.
Construction Labour dispute. Developed X The Private Partner assumes all These risks can be mitigated The Contracting Authority In developing markets, the
risk Interface/project construction risks. through various means, (and the lenders) will Contracting Authority may
management. The concession agreement will typically including ensuring that the have limited inspection, have the right to step into the
address construction risk as part of the Private Partner has the requisite review and approval project to remedy chronic or
Commissioning experience in the sector rights in relation to the emergency situations,
damage. termination regime.
(demonstrated over a lengthy design and construction including gas quality and
IP right period) and obtaining of the works to the facility public health issues.
breach/infringement. appropriate security to the risk of and the network. In developed markets
non-performance (for example, construction risk is considered
Quality assurance
parent company guarantees, manageable through robust
standards.
performance bonds and letters pass through of obligations to
Defective material. of credit). credible and experienced
Latent defects. These mitigants can be subcontractors and by
Subcontractor implemented through the appropriate timetable and
disputes/insolvency. tendering, tender evaluation and budget contingency.
due diligence process and by
Cost overruns where no way of the security provisions in
compensation /relief the relevant documentation.
event applies.
The concession agreement may
SIN-#7991991-v10
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Market Comparison
to terminate if the upgraded
facility and network is not
by a Government risk event) and
step in rights for the Contracting
Authority.
Construction Labour dispute. Emerging X The Private Partner assumes all These risks can be mitigated It is common for the In emerging markets, the
risk Interface/project construction risks unless the risks related through various means, Private Partner to have Contracting Authority may
management. to actions by the Contracting Authority or including ensuring that the detailed reporting have the right to step into the
otherwise fall within force majeure, natural Private Partner has the requisite requirements which project to remedy chronic or
Commissioning or political. experience in the sector provide the Contracting emergency situations, and
damage. (demonstrated over a lengthy Authority with regular also to engage a replacement
IP right period) and obtaining updates as to consents contractor to rectify, remedy or
breach/infringement. appropriate security to the risk of and give early warning address any issues, during the
non-performance (for example, rights of any material construction phase.
Quality assurance
parent company guarantees, delays. In emerging markets, the
standards.
performance bonds and letters Contracting Authority may
Defective material. of credit). accept greater flexibility in the
Latent defects. These mitigants can be construction timetable so that
Subcontractor implemented through the the risk of delays can be
disputes/insolvency. tendering, tender evaluation and accommodated without
due diligence process and by penalising the Private Partner.
Cost overruns where no way of the security provisions in
compensation /relief the relevant documentation.
event applies.
The concession agreement
will also include limited rights
to extend completion date, the
right to terminate if the
upgraded facility and network
is not operational by a
nominated longstop date
(except if caused by a
Government risk event) and
step in rights for the
Contracting Authority.
Insurance will mitigate the
impact of certain construction
risks.
Completion Risk of commissioning Developed X The Private Partner will bear principal The Contracting Authority will The Contracting Authority In developed markets, the
(including delay the asset on time and responsibility for delay cost overrun and usually wish to implement a will generally allow for Private Partner will typically be
and cost on budget. performance risks. single stage completion process certain relief events, delay responsible for familiarising
overrun) risk Risk of performance The principal risk arising out of delay will for commissioning the events or force majeure itself with permitting and
shortfalls. be the loss of expected revenue, the rehabilitated facilities. This will events where delays or consenting requirements and
ongoing costs of financing, construction depend upon the nature of the cost overruns have arisen the Contracting Authority will
Impact of completion project and in some from either the fault of the typically accept little (if any)
risks. and extended site costs. In some
circumstances the ROT project Contracting Authority, or risk for delays associated with
SIN-#7991991-v10
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Market Comparison
circumstances, there will be significant will be commissioned in defined no-fault events. obtaining those.
risks posed to upstream and downstream stages, for example, a network
gas suppliers and users. which is supporting gas
Given the nature of a gas distribution distribution to several different
system, the Private Partner is best placed cities or industrial users
to provide all procurement, construction Financial penalties and
and commissioning of the rehabilitation liquidated damages can help
works across the entire project. This is enforce construction deadlines.
generally managed through the The combination of (i) incentives
engagement of a single EPC contractor or or penalties for timely completion
EPC consortium. In some circumstances and (ii) the implementation of a
certain works may be performed by the “longstop date” (a date which is
Contracting Authority, such as connection pegged to a prescribed time
works or reinforcement or upgrade works period after the scheduled
adjacent to the ROT project. completion date) will create the
The Private Partner will be expected to necessary incentives for timely
demonstrate that the facility is completion while allowing the
substantially complete and meets the Private Partner a reasonable
minimum performance levels before it is amount of time to meet its
given permission to enter into commercial contractual responsibilities in
operation. Gas distribution projects require spite of delays before the
detailed commissioning and testing Contracting Authority can
regimes to ensure that the facility meets terminate the project.
the output, gas quality, efficiency and If the Contracting Authority is
environmental requirements set by the responsible for providing or
minimum functional / performance procuring any new or upgraded
specifications under the gas transportation interconnection facilities, the
agreement, Gas Code and other Contracting Authority will seek to
applicable legislation. put in place arrangements to
If additional interconnection facilities are ensure that those facilities are
required for the project (such as new or procured or upgraded in
upgraded connections to the gas supply sufficient time to enable the
network), construction of these additional performance by the Private
facilities may also be included within the Partner of its obligations. If the
Private Partner’s scope of responsibility, Contracting Authority is unable
transferring the risk of delays and cost to complete such works on time
overruns in the construction to the Private it may be liable to compensate
Partner. Ownership and responsibility for the Private Partner for the
operation and maintenance of these impact of such delays.
additional facilities will be transferred to However, the Contracting
the Contracting Authority on completion of Authority’s liability will be
construction and commissioning, subject minimal when compared to the
to the Private Partner’s defect rectification value of the project.
obligations during the prescribed warranty
period.
Separate testing and taking over
requirements are generally set out for
additional interconnection facilities
transferred to the Contracting Authority on
SIN-#7991991-v10
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Market Comparison
completion.
Completion Risk of commissioning Emerging X The Private Partner will bear principal The Contracting Authority will The Contracting Authority In emerging market gas
(including delay the asset on time and responsibility for delay, cost overrun and usually wish to implement a will generally allow for distribution projects there is
and cost on budget. performance risk. single stage completion process certain relief events, delay increased risk of delays
overrun) risk Risk of performance The principal risk arising out of delay will for commissioning the events or force majeure arising from unanticipated
shortfalls. be the loss of expected revenue, the rehabilitated facilities. Financial events where delays or events during the construction
ongoing costs of financing, construction penalties and liquidated cost overruns have arisen phase and unreliable
Impact of completion damages can help enforce from either the fault of the resources. Ensuring a
risks. and extended site costs.
construction deadlines. Contracting Authority, or realistic time frame at project
Given the nature of a gas distribution no-fault events. out set rather than an
system, the Private Partner is best placed The combination of (i) incentives
or penalties for timely completion Similarly the Contracting ambitious or desired time
to provide all procurement, construction frame may save time and
and commissioning of the rehabilitation and (ii) the implementation of a Authority may need to
“longstop date” (a date which is take responsibility for money for all parties in the
works across the entire project. This is long run.
generally managed through the pegged to a prescribed time delays caused by the
engagement of a single EPC contractor or period after the scheduled failure of public bodies to The Contracting Authority will
EPC consortium. In some circumstances completion date) will create the issue necessary consents need to be prepared to
there will be significant risks posed to necessary tension to incentivise in good time. enforce its rights to manage
upstream and downstream gas suppliers timely completion while allowing the consequences of a failure
and users. the Private Partner a reasonable by the Private Partner to meet
amount of time to meet its the construction milestones. In
The Private Partner will be expected to contractual responsibilities in an emerging market context,
demonstrate that the facility is spite of delays before the the lenders may expect to
substantially complete and meets the Contracting Authority can receive termination
minimum performance levels before it is terminate the project. compensation where the
given permission to enter into commercial Private Partner is in default
operation. Gas distribution projects require If the Contracting Authority is
responsible for providing or have a significant underwrite
detailed commissioning and testing of their senior debt.
regimes to ensure that the facility meets procuring any new or upgraded
the output, gas quality, efficiency and interconnection facilities, the The management of
environmental requirements set by the Contracting Authority should completion risk is typically
minimum functional / performance ensure that those facilities are addressed by having either: (i)
specifications under the gas transportation procured or upgraded in a scheduled completion date
agreement and other applicable sufficient time to enable the (with attached liquidated
legislation. performance by the Private damages for delay) followed
Partner of its obligations. by a fixed period for operation
If additional interconnection facilities are commencing on the actual
required for the project (such as a new If the Contracting Authority is
delayed in completion of its completion date, or (ii) the
substation to supply electricity or new or scheduled construction period
upgraded connections to the gas supply works and this has any impact
on the Private Partner it will be forming part of the fixed
network), construction of these additional operation period (with
facilities may also be included within the required to compensate the
Private Partner for any of the extensions for certain events
Private Partner’s scope of responsibility, such as force majeure).
transferring the risk of delays and cost costs incurred.
overruns in the construction to the Private With the latter scenario, in
Partner. Ownership and responsibility for emerging markets, the
operation and maintenance of these Contracting Authority may
additional facilities will be transferred to attempt to additionally impose
the Contracting Authority on completion of delay liquidated damages on
construction and commissioning, subject the Private Partner. However
to the Private Partner’s defect rectification this decision should always be
SIN-#7991991-v10
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Market Comparison
obligations during the prescribed warranty likelihood that delays will
period. actually lead to losses being
Separate testing and taking over suffered, so as to avoid
requirements are generally set out for unnecessary contingency
additional interconnection facilities being built into the project
transferred to the Contracting Authority on (which then increases ‘price’).
completion.
Performance/ The risk that the asset Developed X The Private Partner bears the risk of The onus is on the Contracting Where certain For developed markets, there
price risk is unable to achieve the achieving the performance specification Authority to draft attainable performance indicators will be well developed
output specification such as gas quality specifications, gas standards based on domestic cannot be met due to minimum standards for the
metrics and the price or flow and volumes. and international gas standards, actions by the Contracting quality and flow rates of gas
cost of doing so. The Contracting Authority bears the risk of relevant market data and Authority or unforeseen and acceptable performance
enforcing the regime and for ensuring that requirements and policy circumstances, the standards
the output specification is properly tailored objectives. Performance based Private Partner may be The Private Partner will often
to what the Private Partner can deliver. on gas quality, flow and volumes eligible to seek relief be benchmarked against the
can be measured against pre- and/or compensation. performance achieved by
Under a regulated returns model for such determined schedules or
assets the Private Partner may be subject other network operators and
standards. the tariff will include elements
to abatement if performance based
standards are not met. The relevant project which fluctuate depending
documents/codes will contain upon meeting KPIs and
clear key performance benchmarking against other
indicators, output specifications, operators.
appropriate financial damages
for non-performance and
transparent reporting
requirements. In developing the
outputs needed, and the desired
performance levels for the
network, the Contracting
Authority should focuses on the
precise service it wishes to
procure and refine the
performance regime (constituted
by acceptance standards and
tests, performance tests and
performance standards) with the
bidders during the bid phase.
These performance levels, once
negotiated, will constitute a key
element of the risk transfer
mechanism.
Performance/ The risk that the asset Emerging X The Private Partner bears the risk of The onus is on the Contracting Where performance For emerging markets,
price risk is unable to achieve the achieving the performance specification Authority to draft attainable cannot be met due to particularly in the case of
output specification such as gas quality specifications and standards based on domestic actions by the Contracting market first projects, the
metrics and the price or guaranteed gas capacity. This will be and, if relevant, international gas Authority or events of preparation of attainable
cost of doing so. subject to the Private Partner receiving standards, relevant market data Government action or standards by the Contracting
within specifications gas volumes above and requirements and policy inaction/Government/buy Authority is often complicated
the minimum levels required to operate objectives. Performance based er risk events, the Private by the lack of relevant and/or
SIN-#7991991-v10
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Market Comparison
the network. on gas quality, flow and volumes Partner may be eligible to historical market data.
The Contracting Authority bears the risk of can be measured against pre- seek relief and/or
enforcing the regime and for ensuring that determined schedules or compensation.
the output specification is properly tailored standards.
to what the Private Partner can deliver. The relevant project documents
Consideration needs to be given to the will contain clear key
ability of the Private Partner to achieve the performance indicators, output
necessary performance levels given the specifications, appropriate
nature of the project and the emerging financial damages for non-
market in which it will be based. performance and transparent
reporting requirements. In
developing the outputs needed,
and the desired performance
levels for the network, the
Contracting Authority should
focuses on the precise service it
wishes to procure and refine the
mechanism.
In some markets, it may be
appropriate to seek improved
performance levels over time
rather than expect the
rehabilitated part of the system
to immediately achieve much
better performance than the
entire gas system.
Resource or The risk that the supply Developed X The principal input or resource required The Private Partner may be In some developed markets
input risk of inputs or resources for a gas distribution project is gas. This is incentivised to increase gas volumes through pipeline
required for the usually within the ownership or control of efficiencies in energy systems have been declining
operation of the project the Contracting Authority and/or system consumption throughout the in recent years, for example,
is interrupted or the operators and users. Accordingly term by a mechanism to share due to falling gas demand due
cost increases. responsibility for the quantity and quality the savings. to low coal prices or declining
of the gas supplied at the delivery point Tariffs may include mechanisms domestic gas sources. This
sits with the Contracting Authority. In to incentivise reductions in puts pressure on the tariffs
most cases the tariff will be set to allow operation costs, such as paid to the network owners as
the Private Partner to recover capital costs indexation at CPI-X. the costs are spread over
and make a reasonable return without reduced volumes.
reference to the volumes of gas supplied
through the network.
In some circumstances a gas distribution
network may require a material power
SIN-#7991991-v10
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Market Comparison
supply for gas compression and pumping
stations. The Private Partner typically
bears the responsibility to supply power to
the facility. The Private Partner will
generally bear the risk of all other
resources to operate the project, such as
labour supply.
Resource or The risk that the supply Emerging X The principal input or resource required The Private Partner may be Where the Contracting Gas markets in emerging
input risk of inputs or resources for a gas distribution project is gas. This is incentivised to increase Authority is unable to markets are often
required for the usually within the ownership or control of efficiencies in energy meet its contracted undeveloped and networks
operation of the project the Contracting Authority and/or systems consumption throughout the thresholds for the quantity may not be fully functional.
is interrupted or the operators and users. Accordingly, term by a mechanism to share and/or quality of gas, or is This increases the risks of
cost increases. responsibility for the quantity and quality the savings. unable to secure the physical curtailment in gas
of the gas supplied at the delivery point supply of the resources it supply. There is also greater
sits with the Contracting Authority. In is responsible for (such as risk of political intervention to
most cases the tariff will be set to allow a continuous energy divert available supplies of
the Private Partner to recover capital costs supply) the Private gas to meet national
and make a reasonable return without Partner may be eligible to requirements for example, gas
reference to the volumes of gas supplied seek relief and/or may be directed towards
through the network. compensation. The tariffs power generation or
In some circumstances a gas distribution will usually be structured household heating rather than
network may require a material power on a ship or pay basis. export.
supply for gas compression and pumping
stations. The Private Partner may bear the
principal responsibility to supply power to
the facility.
The Private Partner will generally bear the
risk of all other resources to operate the
project, such as labour supply.
The Contracting Authority is usually
responsible for ensuring there is sufficient
quantity of line-pack gas within the
system.
Demand risk The availability by both Developed X The default position for gas distribution A ROT project usually relies As the Contracting
volume and quality projects in developed markets is that the upon existing gas suppliers and Authority will be retaining
along with Contracting Authority is a monopoly gas customer demand. gas supply and consumer
transportation of supplier, and has been the monopoly demand risk, it will need
resource or inputs to a distributor through the assets the subject to ensure that it is
project or the demand of the project, and will guarantee minimum comfortable (both
for the product of quality, volumes and availability for politically and
service of a project by supplied gas and retain a minimum level economically) with gas
consumers/users of demand risk. supply and consumer
In most cases, the tariff will be set to allow demand forecasts.
the Private Partner to recover capital costs
and make a reasonable return without
reference to the volumes of gas shipped
through the network.
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Demand risk The availability by both Emerging X in emerging markets the Contracting A ROT project usually relies on As the Contracting For emerging markets,
volume and quality Authority is likely to be the monopoly gas existing gas suppliers and Authority will be retaining particularly in the case of
along with supplier, and has been the monopoly customer demand. raw gas supply and market first projects, the
transportation of distributor through the assets the subject consumer demand risk, it preparation of demand profiles
resource or inputs to a of the project, and will guarantee minimum will need to ensure that it by the Contracting Authority is
project or the demand quality, volumes and availability for is comfortable (both complicated by the lack of
for the product of supplied gas and retain a minimum level politically and relevant and/or historical
service of a project by of demand risk. economically) with gas market data.
consumers/users supply and consumer The high incidence of delayed
demand forecasts. project execution in emerging
markets means that demand
forecasts are often out-dated
by project completion.
Regimes for network
expansion are often drafted
into the concession
agreement in order to facilitate
quick and efficient project
expansion.
Maintenance The risk of maintaining Developed X As occupier and operator of the facility The Contracting Authority should Generally, the Contracting In developed markets, the
risk the asset to the until its transfer to the Contracting take time to ensure that the gas Authority’s role will be involvement of the Private
appropriate standards Authority at the end of the term, the transportation limited to defining Partner in the operation and
and specifications for Private Partner will have responsibility for arrangements/Gas Code minimum maintenance maintenance of the project
the life of the project. meeting the maintenance requirements properly defines the thresholds requirements, ensuring provides several benefits by
Incorrect estimates and defined by the Contracting Authority for the supply of gas into the that these are met and incentivising greater care and
cost overruns. during the bidding process and/or in the connection point for the project enforcing for rectification diligence by the Private
gas transportation arrangements / Gas and the Private Partner’s if they are not. Partner in the rehabilitation
Code. obligations from that point. The Contracting Authority works (construction) phase to
In addition to specific maintenance Additionally, the arrangements may be required to ensure the operational life of
requirements imposed by the Contracting should properly define the maintain interconnections the facility and that operation
Authority, the Private Partner will be maintenance obligations on the with the facility, such as and maintenance
responsible for maintaining the facility so Private Partner to ensure that the gas supply system considerations are
as to meet the requirements under the gas the facility is properly maintained appropriately considered in
transportation arrangements/Gas Code throughout the life of the project, the design of the rehabilitation
and all applicable regulations. to ensure that the facility is in a works.
The Private Partner generally assumes satisfactory condition in the It is common for operators to
the risk of all maintenance, including event of early termination or on ta be subject to benchmarking
periodic and preventative maintenance, expiry of the agreement, at against other operators of
emergency maintenance work, work which point the facility will be regulated gas network
stemming from design or construction transferred to the Contracting pipelines.
errors and all rehabilitation work. Authority. The Contracting The tariffs will include
Authority should also consider elements which fluctuate
Maintenance events affecting the whether any long term services
availability of the facility and impacting on depending upon meeting KPIs
or supplies should be secured and benchmarking against
supply are generally scheduled by for the facility.
agreement with the Contracting Authority other operators.
and scheduled maintenance may be The Contracting Authority should
prohibited during times of peak demand. consider specific requirements in
relation to the use of property
SIN-#7991991-v10
Government Support
Market Comparison
The Contracting Authority generally damage insurance to reinstate
retains the risk of certain events impacting the facility and whether such
the project (such as political risk and requirements take precedence
regulatory / change in law risk). In this over any requirements of
case, the Contracting Authority may be financing parties.
required to provide relief to the Private Adequate performance by the
Partner for the impacts on the project of Private Partner will be further
additional maintenance required by those enforced by ensuring that the
events (including the additional costs of payment mechanism reflects the
maintenance), but responsibility for Private Partner’s ability to meet
performance of the maintenance remains the contractual levels of volume,
with the Private Partner. availability and quality and by
The Contracting Authority may retain the including termination triggers for
maintenance risk associated with the material performance shortfalls.
infrastructure connecting with the facility, There may also be specific
such as the gas supply pipe delivering the transfer provisions providing for
gas to the facility’s connection point. It is the condition of the facility to be
usual for the Contracting Authority to also assessed during the last few
assume responsibility for all maintenance years of the project. The Private
of the facility on its transfer to the Partner will then be required to
Contracting Authority at the end of the carry out any remedial work
term. necessary to ensure that the
facility meets the required
standards on the date of transfer
to the Contracting Authority at
the end of the term.
Maintenance The risk of maintaining Emerging X As occupier and operator of the facility The Contracting Authority should Generally, the Contracting In developed markets, the
risk the asset to the until its transfer to the Contracting take time to ensure that the raw Authority’s role will be involvement of the Private
appropriate standards Authority at the end of the term, the gas transportation arrangements limited to defining Partner in the operation and
and specifications for Private Partner will have responsibility for for the supply of gas into the minimum maintenance maintenance of the project
the life of the project. meeting the maintenance requirements connection point for the project requirements, ensuring provides several benefits by
Incorrect estimates and defined by the Contracting Authority and the Private Partner’s that these are met and incentivising greater care and
cost overruns. during the bidding process and/or in the obligations from that point. enforcing for rectification diligence by the Private
gas transportation arrangements. Failure to get the thresholds right if they are not. Partner in the rehabilitation
In addition to specific maintenance for the project effectively transfer The Contracting Authority works (construction) phase to
requirements imposed by the Contracting risk back to the Contracting may be required to ensure the operational life of
Authority, the Private Partner will be Authority. maintain interconnections the facility and that operation
responsible for maintaining the facility so with the facility, such as and maintenance
Additionally, the arrangements considerations are
as to meet the requirement under the gas should properly define the the gas supply system.
transportation arrangements/Gas Code appropriately considered in
maintenance obligations on the In certain markets the the design of the rehabilitation
and all applicable regulations. Private Partner to ensure that Contracting Authority may works. Additionally, in
The Private Partner generally assumes the facility is properly maintained be required to undertake emerging markets, the
the risk of all maintenance, including throughout the life of the project, certain activities in Contracting Authority should
periodic and preventative maintenance, to ensure that the facility is in a support of the project for consider its ability to take on
emergency maintenance work, work satisfactory condition in the example security, responsibility for maintenance
stemming from design or construction event of early termination or on prevention of acts of following the transfer of the
errors and all rehabilitation work (including expiry of the agreement, at vandalism and assistance facility on early termination or
latent defects). which point the facility will be obtaining consents expiry and whether provisions
SIN-#7991991-v10
Government Support
Market Comparison
Maintenance events affecting the transferred to the Contracting required for the should be put in place to
availability of the facility and impacting on Authority. The Contracting operations phase. support the necessary transfer
supply are generally scheduled by Authority should also consider of expertise and/or personnel
agreement with the Contracting Authority whether any long term services in the short term.
and scheduled maintenance may be or supplies should be secured
prohibited during times of peak demand. for the facility.
The Contracting Authority generally The Contracting Authority should
retains the risk of certain events impacting consider specific requirements in
the project (such as political risk and relation to the use of property
regulatory / change in law risk). In this damage insurance to reinstate
case, the Contracting Authority may be the facility and whether such
required to provide relief to the Private requirements take precedence
Partner for the impacts on the project of over any requirements of
additional maintenance required by those financing parties.
events (including the additional costs of Adequate performance by the
maintenance), but responsibility for Private Partner will be further
performance of the maintenance remains enforced by ensuring that the
with the Private Partner. payment mechanism reflects the
The Contracting Authority may retain the Private Partner’s ability to meet
maintenance risk associated with the the contractual levels of volume,
infrastructure connecting with the facility, availability and quality and by
such as the gas supply pipe delivering the including termination triggers for
gas to the facility’s connection point. It is material performance shortfalls.
usual for the Contracting Authority to also There may also be specific
assume responsibility for all maintenance transfer provisions providing for
of the facility on its transfer to the the condition of the facility to be
Contracting Authority at the end of the assessed during the last few
term. years of the project. The Private
Partner will then be required to
carry out any remedial work
necessary to ensure that the
Force majeure The risk that Developed X Force majeure is a shared risk and there Project insurance (physical If the force majeure event In many developed markets
risk unexpected events will be a fairly well developed list of events damage and loss of revenue is political there may be the Private Partner and its
occur that are beyond that entitle the Private Partner to relief. coverage) is the key mitigant for support from the lenders will rely upon general
the control of the Typical events could include: force majeure risks that cause Contracting Authority protections under the law and
parties and delay or physical damage. depending upon the investment regimes rather
prohibit performance. - natural force majeure events, which regulatory and contractual than expecting specific
typically can be insured (e.g. lightening, On availability based projects,
the risk of disruption as a result regime. regimes protecting it from
fire, earthquake, tsunami, flood, cyclone, political risks.
or other natural calamity/act of God, of no-fault events could be
epidemic or plague, accidents or mitigated by relaxing the
explosions etc), and performance thresholds (e.g.
paying the Private Partner for
- other force majeure events which actual gas availability during the
typically cannot be insured (often force majeure event and
SIN-#7991991-v10
Government Support
Market Comparison
described as ‘political force majeure’ relieving it from any penalties for
events) (e.g. war within the jurisdiction, consequent inability to perform).
strikes / protest, terrorism, riots etc). Alternatively the project may be
The Private Partner will generally be subject to abatement but
entitled to an extension of time (but excused from non-
sometimes only over an agreed threshold) performance/breach.
and additional costs only in the event of a
political force majeure, but an extension of
time only in the event of a natural force
majeure.
construction will also cause a delay in
revenue commencement. The ability of
the Private Partner to bear this risk for
events of ‘political force majeure’ will be
limited, and the Contracting Authority will
typically have to bear the risk after a
certain period of time or level of cost has
been exceeded.
During the operation period, the impact of
the force majeure will depend on whether
the force majeure is ‘natural’ or ‘political’.
In the event of natural force majeure, the
Private Partner would be entitled to the
tariff to the extent of its availability. If it is a
political force majeure event, the Private
Partner would be entitled to the tariff on
the basis of the availability of the plant as
tested by the last availability test.
Where it is a prolonged force majeure
event, the Contracting Authority and/or the
Private Partner may have the right to
terminate. Whether compensation is
payable will depend upon the regulatory
regime and the protections under the
general laws applicable to sector and
investments.
Force majeure The risk that Emerging X Force majeure is a shared risk and there Project insurance (physical See comments on the risk Force majeure risks usually sit
risk unexpected events will be a fairly well developed list of events damage and loss of revenue of uninsurability for a gas with the Contracting Authority.
occur that are beyond that entitle the Private Partner to relief. coverage) is the key mitigant for distribution project in In some markets the
the control of the Typical events could include: force majeure risks that cause emerging markets. Contracting Authority will
parties and delay or physical damage. It may be endeavour to allocate these
prohibit performance. - natural force majeure events, which possible to insure against risks to the Private Partner on
typically can be insured (e.g. lightening, upstream or downstream events the grounds that insurance is
fire, earthquake, tsunami, flood, cyclone, through “suppliers extensions” available.
or other natural calamity/act of God, for loss of revenue coverage.
epidemic or plague, accidents or
explosions etc), and On availability based projects,
the risk of disruption as a result
SIN-#7991991-v10
Government Support
Market Comparison
- other force majeure events which of no-fault events could be
typically cannot be insured (often mitigated by relaxing the
described as ‘political force majeure’ performance thresholds (e.g.
events) (e.g. war within the jurisdiction, requiring a lower level of
strikes / protest, terrorism, riots etc). availability without incurring
The Private Partner will generally be performance penalties).
entitled to an extension of time (but
sometimes only over an agreed threshold)
and additional costs in the event of a force
majeure. The relief available may be
limited in the event of natural force
majeure.
been exceeded.
tariff to the extent of its availability. If the
force majeure event is due to an upstream
of downstream event the Contracting
Authority will usually be required to pay
the tariff even if the event is natural force
majeure If it is a political force majeure
event, the Private Partner would be
entitled to the tariff on the basis of the
availability of the plant as tested by the
last availability test.
event, the Contracting Authority and/or the
Private Partner would generally have the
right to terminate. The Private Partner
would generally expect to receive more
equity return than for termination for a
‘natural’ force majeure event.
Exchange and The risk of currency Developed X The Contracting Authority would The Private Partner would look The Contracting Authority In developed markets, the risk
interest rate risk fluctuations and or the specifically prohibit the Private Partner to mitigate this risk through is not expected to assist of currency fluctuations and
interest rate over the from claiming additional costs for general hedging arrangements under the the Private Partner in interest rates can usually be
life of a project currency and interest rate fluctuations. Finance Documents, to the mitigating such risks. hedged at reasonable rates
The Private Partner would look to mitigate extent possible in that market. and is a risk that is best borne
SIN-#7991991-v10
Government Support
Market Comparison
this risk through hedging arrangements by the Private Partner.
under the Finance Documents, to the
extent possible in that market.
Exchange and The risk of currency Emerging X The Contracting Authority would The Private Partner would look As the gas tariffs will In emerging markets, the risk
interest rate risk fluctuations and or the specifically prohibit the Private Partner to mitigate this risk through usually be paid in local of currency fluctuations is
interest rate over the from claiming additional costs for general hedging arrangements under the currency, the Contracting often a key bankability issue.
life of a project currency and interest rate fluctuations, Finance Documents, to the Authority may retain the Issues of convertibility of
although certain elements of the tariff may extent possible in that market. risk of devaluation of the currency and restrictions on
be adjusted for fluctuations between the local currency to the the repatriation of funds are
local currency and relevant foreign extent that such also bankability issues,
currencies. In particular it is common devaluation impacts on especially upon termination.
practice to index a portion of operating the economic viability of
costs to movements in foreign currencies. the project (due to the
The Private Partner would look to mitigate need to pay for foreign
this risk through hedging arrangements currency imports and
under the Finance Documents, to the service foreign currency
extent possible in that market. debt).
Insurance risk The risk that insurance Developed X Where risks become uninsurable (ie not As part of the feasibility study The Contracting Authority In developed market
for particular risks is or available on commercially reasonable the Contracting Authority and may need to consider transactions, as neither party
becomes unavailable. terms in the international insurance Private Partner should consider whether it stands behind can better control the risk of
market) there is typically no obligation to whether insurance might unavailability of insurance coverage becoming
maintain insurance for such risks. become unavailable for the insurance, in particular unattainable and insurance
project given the location and where this has been coverage should be less
other relevant factors. caused by in-country or volatile than for emerging
regional events or markets, this is typically a
circumstances. shared risk. However, in
some developed jurisdictions
uninsurable risk may remain
with the private sector.
Where the cost of the required
insurance increases
significantly, the risk is
typically shared by either
having an agreed cost
escalation mechanism up to
ceiling or a percentage
sharing arrangement - this
allows the Contracting
Authority to quantify the
contingency that has been
In circumstances where the
SIN-#7991991-v10
Government Support
Market Comparison
Insurance risk The risk that insurance Emerging X Where risks become uninsurable (ie not As part of the feasibility study, The Contracting Authority On emerging market
for particular risks is or available on commercially reasonable the Contracting Authority and may need to consider transactions, the Contracting
becomes unavailable. terms in the international insurance Private Partner should consider whether it stands behind Authority often takes the risk
market) there may be no obligation to whether insurance might unavailability of of uninsurability arising on the
maintain insurance for such risks. become unavailable for it given insurance, in particular project.
If an uninsured risk event occurs, the the location and other factors where this has been
parties may agree to negotiate in good relevant to the project. caused by in-country or
faith risk allocation going forward, while regional events or
allowing for the termination of the project if circumstances.
an agreement cannot be reached. The
Contracting Authority may choose to
assume responsibility for the uninsurable
risk, while requiring the Private Partner to
regularly approach the insurance market
to obtain any relevant insurance.
major project components) and the parties
are unable to agree on suitable
arrangements then the Private Partner
may need an exit route (e.g. termination of
the project on the same terms as if it were
an event of force majeure) if it cannot
basis.
Political risk The risk of Government Developed X The Contracting Authority will bear The Contracting Authority will This type of issue may The major political risks for a
intervention, responsibility for political events outside outline certain political events as lead to a termination regulated gas distribution
discrimination, seizure the Private Partner’s control, and the delay events, compensation event where the network is change in the
or expropriation of the Contracting Authority will be responsible events excusing causes (relief Contracting Authority will applicable regulatory regime.
project. should it fail to continually provide the from payment deductions) that need to stand behind debt The Private Partner will often
Private Partner with the lease or licence involve a breach of obligations or and equity or the Private assess this risk as part of its
and access to necessary sites and the interference by the Contracting Partner will seek general initial due diligence review.
network necessary to allow the Private Authority with the project. protection from
Partner to fulfil its obligations. investment protection
laws.
Political risk The risk of Government Emerging X The Contracting Authority typically bears The Contracting Authority will This type of issue can Investors and commercial
intervention, responsibility for political events outside need to ensure that other lead to a termination right lenders may also be able to
discrimination, seizure the Private Partner’s control. Government departments keep for the Private Partner cover themselves by use of
or expropriation of the This concept may include any act or in line with the project objectives and the Contracting political risk insurance, leaving
project. omission of any Government entity which and will need to actively manage Authority will need to this risk to be managed by the
may have a material adverse impact on the various stakeholders in the stand behind debt and insurer against the
the Private Partner’s ability to perform its project to achieve this. equity, potentially with a Contracting Authority.
obligations and/or exercise its rights under Government guarantee.
the concession.
SIN-#7991991-v10
Government Support
Market Comparison
Regulatory/chan The risk of law Developed X The impact of change in law on a gas Change in law risk that is The Contracting Authority In developed markets, the
ge in law risk changing and affecting distribution business is often dealt with retained by the Private Partner should be mindful of how Private Partner will typically
the ability of the project through the regulatory reset process. In may be mitigated by indexation it will fund these not be compensated for
to perform and the price some cases, the regulatory regime will provisions (on the basis that specific/discriminatory General Changes and likely
at which compliance often allow the network operator to apply general changes in law will affect changes should they will have less protection than
with law can be for tariff adjustments outside the usual the market equally and should arise. in emerging countries where
maintained. reset process where the costs of operating be reflected in general inflation). Contracting Authority will be
Change in taxation. and maintaining the pipeline have been Some projects only permit the expected to bear a significant
increased materially since the last reset. Private Partner to claim relief for portion of the change in law
general changes in law occurring risk in order to attract private
after completion of construction. investment.
This approach may be justified if
the country's legal regime
ensures that the prevailing legal
regime at the start of
construction is fixed until the
works are complete (i.e. does
not operate retrospectively to
projects in progress).
Regulatory/chan The risk of law Emerging X The risk of change in law sits with the The Contracting Authority will Some projects may also In emerging markets:
ge in law risk changing and affecting Contracting Authority. The Private Partner need to ensure that various provide for a stabilisation (a) the Private Partner is likely
the ability of the project will be entitled to claim for any increased Government departments keep clause that entrenches to have a greater level of
to perform and the price costs and in relation to delay arising from the project in mind when passing certain legal positions protection from changes in law
at which compliance a change in law. new laws to ensure that the (such as the current tax to reflect the greater risk of
with law can be A change in law is generally specifically Private Partner is not regime) against any future change (including both
maintained. defined and may include: inadvertently affected. changes in law. This may likelihood and consequences)
The various Government require a level of and in order to attract
(i) any law coming into effect after the parliamentary ratification
effective date, or existing law being departments that may impact on investors to the project. In that
the project should therefore be of the concession way, the Contracting Authority
modified after the effective date; (ii) any agreement.
required Private Partner consent being cognisant of the risk allocation in would be expected to assume
terminated or the introduction of the project when passing laws However, the stabilisation more change in law risk than
conditions upon renewal which materially and regulations that may have method is generally not compared to a project in a
adversely affect the Private Partner; (iii) an impact on it. favoured by Governments developed market;
the unjustified refusal to grant a permit or NGOs (e.g. because of (b) the Private Partner does
and (iv) a change in gas quality standards. the concept of Private not generally have to prove
Partner immunity from that it could have anticipated
updates to environmental the change in law, provided
laws, for example). that it occurred after an
agreed base date; and
(c) changes in the
environmental, safety and
health law which are no more
onerous than those prevailing
internationally specifically
SIN-#7991991-v10
Government Support
Market Comparison
excluded as changes in law.
Inflation risk The risk that the Developed X Inflation risks during construction will be In some markets the project may The tariff may account for In many developed markets
inflation costs of the borne by the Private Partner be financed with RPI-linked debt. inflation costs by over recent years, inflation
project increase more Under a regulated model the tariff set for incorporating the does not experience
than expected. each regulatory period may include some consumer price index. fluctuations to the extent of
level of inflation linkage although it is emerging markets. However,
common for it to be structured on a CPI-X investors will expect tariffs to
model to incentivise year on year cost include a degree of protection
reductions and efficiency. against inflation
Inflation risk The risk that the Emerging X Inflation risk is typically borne by the The Private Partner will look to The payment mechanism The fluctuation of inflationary
inflation costs of the Contracting Authority. be kept neutral in respect of both incorporates indexation costs is a greater risk in
project increase more The tariff will typically include both a fixed international and local for inflation costs by emerging markets than it is in
than expected. component (where debt has been hedged) inflationary costs through an incorporating the developed markets and the
and a variable component (to reflect appropriate inflation uplift or tariff consumer price index into Private Partner’s expectation
variable financing costs and variable adjustment regime. the monthly payments. will be that this risk is borne
inputs such as operating costs and The Contracting Authority may and managed by the
insurance). encourage the Private Partner to Contracting Authority during
hedge against inflation through the concession term.
locking in long term supply Indexation for inflation is
contracts. typically linked to local
(sometimes in conjunction
with an international)
consumer index
Strategic risk Change in shareholding Developed X Bids are awarded on the basis of the Contracting Authority will limit In developed markets, the lock
of Private Partner. Private Partner’s technical expertise and Private Partner’s ability to in periods and conditions are
Conflicts of interest financial resources. The Contracting change shareholding for a typically less restrictive than in
between shareholders Authority will often want to ensure that the specified minimum period (i.e. developed markets with
of Private Partner. sponsors, particularly founding sponsors, lock-in for construction period) Contracting Authorities’ being
to whom the project is awarded remain and thereafter may impose a more comfortable with
involved for a minimum period of time. regime restricting change in changes in shareholding to
control without consent or where equivalent owners.
pre-agreed criteria cannot be In some situations the
met. Contracting Authority will rely
Pre-tender proposal should set upon the ROT project
out proposals for governance of retaining an investment grade
Private Partner. status following any share
Where Private Partner proposes transfer.
a change in shareholding within
that lock-in time, Contracting
Authority may consent where the
new owners meet specified
criteria regarding equivalent
technical expertise and financial
resources.
Strategic risk Change in shareholding Emerging X Bids are awarded on the basis of Private Contracting Authority will limit In emerging markets, the lock
of Private Partner. Partner’s technical expertise and financial Private Partner’s ability to in periods and conditions are
SIN-#7991991-v10
Government Support
Market Comparison
Conflicts of interest resources. The Contracting Authority change shareholding for a typically more restrictive and
between shareholders wants to ensure that the sponsors, specified minimum period (i.e. longer than in developed
of Private Partner. particularly founding sponsors, to whom lock-in for construction period) markets.
the project is awarded remain involved for and thereafter may impose a
a minimum period of time. regime restricting change in
met.
Pre-tender proposal should set
Private Partner.
Where Private Partner proposes
resources.
There may be express
restrictions on changes to the
constitution of the Private
Partner or shareholder
arrangements.
Disruptive Gas demand falls Developed X The Contracting Authority will usually take The regulatory reset process The process of gas being
technology risk significantly due to the risks associated with reductions in gas allows the Contracting Authority distributed in more developed
rapid falls in other demand due to change in technology and the Private Partner to markets has been disrupted
energy prices (for affecting the customers or gas suppliers. assess the impact of disruptive due to the rapid rise in the use
example the cost of technology and how such of solar PV generation.
solar), new pipeline advances can be addressed in
technology makes the stricture and rate of the tariff.
existing tariff
uneconomic (for
example use of plastic
piping), gas demand
falls significantly due to
gas price increases (for
example a substantial
carbon tax)
Disruptive Gas demand falls Emerging X The Contracting Authority will usually take In an emerging market the In emerging markets, this risk
technology risk significantly due to the risks associated with reductions in gas disruptive technology may is not typically addressed in
customers switching to demand due to change in technology enable the operator to employ the project documents. As
alternative energy affecting the customers or gas suppliers. new technologies and reduce project implementation and
supply (such as operating costs when compared execution are often delayed in
microgrids with solar to traditional models. emerging markets, the risk of
PV and storage) disruptive technology may be
considered higher than in
SIN-#7991991-v10
Government Support
Market Comparison
developed markets.
Early The risk of a project Developed X The Contracting Authority can face the The primary mitigant is that In most circumstances In most developed markets
termination being terminated before following risks on expiry or termination of termination rights will be limited these will be limited. In the gas market regulations will
(including any the expiry of time and the concession period: in a regulated gas market most circumstances these not include detailed
compensation) the monetary (a) uncertainty about the type and context and the parties will rely will be limited. termination compensation
risk consequences of such timing of transfer of the assets upon the regulator and the provisions and the Private
termination (either back to the Contracting protections built into the regime. Partner and the Contracting
Authority or to a replacement The Contracting Authority should Authority will rely upon the
Private Partner); ensure that there is no relevant laws and general
uncertainty about the Private investment protection.
(b) re-delivery of poor condition or
out-of-specification assets; Partner’s obligations at the end
of the concession period (due to
(c) receiving inadequate expiry or termination).
compensation for non-
performance and early These matters can be addressed
termination (if applicable); in the concession agreement
and should deal with redelivery
(d) inability to obtain the benefit of obligations, compensation
supply/manufacturer warranties; (either on a net book value or
and present market value basis),
(e) other related political and public access to warranties and
relations issues. guarantees and transfer of
operation and maintenance
The level of compensation payable on
know-how.
early termination will depend on the
reasons for termination and typically for: In some developed markets
there may be step-in rights
1) Contracting Authority default – the
granted to Lenders although this
Private Partner may be entitled to claim
is rare in the context of regulated
compensation for its losses;
gas markets.
(2) Non-default termination – if the
Contracting Authority chooses to
terminate, the Private Partner may be
entitled to claim compensation for its
losses; and
(3) Private Partner default – no
compensation payable unless set out in
the regulatory regime.
Early The risk of a project Emerging X The Contracting Authority can face the The Contracting Authority should The covenant risk of the In emerging markets, there
termination being terminated before following risks on expiry or termination of ensure that there is no Contracting Authority may may also be sovereign
(including any the expiry of time and the concession period: uncertainty about the Private require a guarantee from guarantees which support the
compensation) the monetary (a) uncertainty about the type and Partner’s obligations at the end a higher level of Contracting Authority’s
risk consequences of such timing of transfer of the assets of the concession period (due to Government to guarantee payment obligations.
termination (either back to the Contracting expiry or termination). the level of compensation Political risk insurance may be
Authority or to a replacement These matters can be addressed payable on termination. available and is likely to be
Private Partner); in the concession agreement The lenders will require sought to cover the risk of the
(b) re-delivery of poor condition or and should deal with redelivery direct agreements with Contracting Authority or
out-of-specification assets; obligations, compensation the Contracting Authority Government guarantor
(either on a net book value or giving the lenders step-in defaulting on its payment
SIN-#7991991-v10
Government Support
Market Comparison
(c) receiving inadequate present market value basis), rights in the case of the obligation.
compensation for non- access to warranties and Contracting Authority
performance and early guarantees and transfer of calling a default
termination (if applicable); operation and maintenance termination or in the event
(d) inability to obtain the benefit of know-how. of the Private Partner
supply/manufacturer warranties; A further key mitigant is to make being in default under the
and sure the termination triggers are loan documentation. The
not hair triggers and that there lenders would typically be
(e) other related political and public given a grace period to
relations issues. are adequate well-defined routes
for each party to remedy any gather information,
The level of compensation payable on alleged default. manage the project
early termination will depend on the company and seek a
reasons for termination and typically for: resolution or ultimately
novate the project
documents to a suitable
Private Partner would get senior debt,
substitute concessionaire.
termination costs, equity and expected
equity returns; equity may be limited to a
certain number of years from the date of
termination
Partner would get senior debt, termination
costs, equity and (in some cases) a
portion of expected equity returns; and
(3) Private Partner default – the Private
Partner would seek to get senior debt and
termination costs.
SIN-#7991991-v10
Water and sanitation
SIN-#7991991-v10
Risk Matrix 10: Water desalination project (BOOT) 204
Water and Sanitation Sector

Risk Matrix 10: Water desalination (BOOT)
 New desalination plant as a BOOT project where the water is sold to a state owned single buyer
 Project scope may include associated infrastructure, such as water pipelines and electricity transmission, and, if necessary, generation facilities
 Technology may include two main technologies, reverse osmosis or distillation (main sub-technologies comprising MSF and MED). Technologies are usually specified
by the procuring entity but do result in different technological risks for the project, for example RO technology is more susceptible to seawater quality including blooms
of algae such as red tide
 Key risks
 Construction risk
 Disruptive technology risk
Government Support
Market Comparison
and site risk title to the land to be principal risk for ensuring that the required undertake detailed ground, may need to use its conditions in developed
used for a project, the land interests in the site designated for the environmental and social legislative powers to markets are typically more
selection of that site project are available as it has selected the assessments and should secure the site (e.g. established and risks can be
and the geophysical site. The land interests may be provided disclose such information to the through expropriation / mitigated with appropriate due
and hydrological by the Contracting Authority, if it has or Private Partner as part of the compulsory acquisition). diligence with relevant land
conditions of that site. has acquired the relevant land rights, or a bidding process. Even where you have a registries and utility records.
Planning permission. third party landowner who has agreed to The Contracting Authority should legally clear site, The Private Partner’s
grant the relevant land rights. As the allow access to the Private Government enforcement obligations with regards to
Access rights. project will be transferred to the Partner during the bidding powers may be needed to indigenous rights are
Security. Contracting Authority at the end of the process to carry out its own properly secure the site generally well legislated in
agreed term, the land rights are usually surveys of the site and any for the project. There may developed markets, for
Heritage.
granted to the project under lease or existing assets or constructions. be historic encroachment example requirement to enter
Archaeological. similar arrangements.
The Contracting Authority issues that the Private into indigenous land use
Pollution. Land arrangements will need to extend to Partner cannot be agreements under native title
should, to the greatest extent
Latent defects. those required for water pipelines and possible, ensure that it has a expected to deal with. legislation in Australia and the
other utilities (for example if significant complete understanding of the Examples include the equivalent under first nations
electricity connection or generation works risks involved in securing the site need to manage the law in Canada.
are required). Some responsibility for and the site constraints that may relocation of people (e.g.
these may sit with the Private Partner if impact on the construction and the removal of informal
they are dependent on project design. operation of the facility. housing or businesses)
The Private Partner will be responsible for The Contracting Authority should and continued efforts to
assessing the adequacy of the site also manage any indigenous manage the social and
designated by the Contracting Authority land rights issues that may political impact of the
and the land rights granted (including any impact on the use of the site. project on and around the
associated easements and access rights) site.
and any restraints that the designated site
may impose on the design (such as the
overall layout and proposed foundation
solution) and construction of the project
(including access routes to the site and
available laydown areas).
That said, there will be some areas where
risk of site conditions will be shared with
the Contracting Authority.
fossils and manmade substructures, to the
extent not already known or revealed by
site surveys, either by dealing with such
finds or providing relief for the impacts on
the project. The Contracting Authority may
also accept responsibility for unknown
geotechnical conditions although this may
be limited to certain types of conditions
and will be restricted to conditions that
were not reasonably foreseeable based
on site surveys performed or which should
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have been performed by the Private
Partner.
perform site surveys to provide a baseline
report to demonstrate pre-existing site
conditions.
have been identified and require such
assets to be removed or relocated.
Land purchase The risk of acquiring Emerging X Regardless of whether the land is The Contracting Authority should The Contracting Authority Land rights and ground
and site risk title to the land to be Government land or private land, the undertake detailed ground, may need to use its conditions (in particular
used for a project, the Contracting Authority would generally be environmental and social legislative powers to reliable utilities records, and
selection of that site responsible for obtaining the relevant land assessments and should secure the site (e.g. land charges) in emerging
and the geophysical rights for the developer to access and use disclose such information to the through expropriation / markets may be less certain
and hydrological the land – this is sometimes in the form of Private Partner as part of the compulsory acquisition). than in developed markets
conditions of that site. an usufruct agreement. bidding process. The where established land
Planning permission. If, as is sometimes the case, the land for Contracting Authority may also registries and utility records
commence the environmental Typically the Contracting exist. Lenders and sponsors
Access rights. the project (particularly in the case of Authority will be required
distribution or transmission pipelines) impact assessment process often have to become
Security. during the bid phase to speed up to manage a range of comfortable with wholly
does not have any title deeds, the different interests and
Contracting Authority will be required to an often very protracted process. contractual land rights
Heritage. stakeholders in relation
arrange for a contractual licence to use The Contracting Authority should (registered only through the
Archaeological. allow access to the Private the land rights being notarisation process).
the land. The Private Partner and their provided over a
Pollution. lenders are generally comfortable with Partner during the bidding In the absence of legislation in
process to carry out its own designated site area.
Latent defects. these arrangement, although such an emerging markets, indigenous
interest will not be registrable. surveys of the site and any Examples include efforts land rights issues and
existing assets or constructions. to manage the social and community engagement can
The Private Partner will be responsible for political impact of the
assessing the adequacy of the site The Contracting Authority be managed by the
should, to the greatest extent project on and around the Contracting Authority through
designated by the Contracting Authority site. This can be a
and the land rights granted (including any possible, ensure that it has a the adoption of IFC
complete understanding of the particularly sensitive issue Safeguards for the project,
associated easements and access rights) in an emerging market.
and any restraints that the designated site risks involved in securing the site particularly in order to ensure
may impose on the design (such as the and the site constraints that may international financing options
overall layout and proposed foundation impact on the construction and are available to the project.
solution) and construction of the project operation of the facility. See comments on
(including access routes to the site and The contract between the “Environmental and Social
available laydown areas). Contracting Authority and the Risk” for a desalination plant
Private Partner should also project in emerging markets.
That said, there will be some areas where
risk of site conditions will be shared with address specific relief in relation
the Contracting Authority. to ground conditions (including
contamination).
fossils and manmade substructures, to the
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extent not already known or revealed by
site surveys, either by dealing with such
finds or providing relief for the impacts on
the project. The Contracting Authority may
also accept responsibility for unknown
geotechnical conditions although this may
be limited to certain types of conditions
and will be restricted to conditions that
were not reasonably foreseeable based
on site surveys performed or which should
have been performed by the Private
Partner.
perform site surveys to provide a baseline
report to demonstrate pre-existing site
conditions.
have been identified and require such
assets to be removed or relocated.
and social risk latent environmental responsibility to manage the conduct the necessary initial due will need to take increasing even in developed
conditions affecting the environmental and social strategy across diligence in order to ascertain meaningful steps both markets, as both Private
project and the the project, however existing the environmental fitness of the before and during the Partners and Contracting
subsequent risk of environmental conditions which cannot be site and disclose all known project to manage social Authorities have come under
damage to the adequately catered for or priced (such as environmental issues to the impacts of construction increasing burdens to develop
environment or local intake water contamination) may be Private Partner. and operation. sound environmental and
communities retained by the Contracting Authority. The Private Partner would also Investors and lenders social risk management plans
be required to carry out a full site may expect to see a plan before construction begins.
investigation and the Contracting to see how these aspects
Authority will be required to are dealt with.
review all environmental plans
prepared by the Private Partner,
to ensure that such plans will be
adequate to appropriately
manage the risks of the project.
conditions affecting the environmental and social strategy across diligence in order to ascertain meaningful steps both institutions are particularly
project and the the project, however existing the environmental fitness of the before and during the sensitive about environmental
subsequent risk of environmental conditions which cannot be site and disclose all known project to manage social and social risks, as a result of
damage to the adequately catered for or priced (such as environmental issues to the impacts of construction their commitment to the
environment or local intake water contamination) may be Private Partner. In light of these and operation. The Equator Principles. They will
communities retained by the Contracting Authority. investigations, the contract Contracting Authority will look very closely at how these
between the Contracting often be required to risks are managed at both
Authority and the Private Partner manage a range of private and public sector level
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will generally provide for the different interests and and this scrutiny is helpful to
allocation of environmental and stakeholders in relation mitigate the risks posed by
social risk. these issues. The these issues.
The Private Partner would also Contacting Authority is
be required to carry out a full site unlikely to be able to
investigation and the Contracting provide any warranty in
Authority will be required to relation to these issues.
review all environmental plans
prepared by the Private Partner,
Design risk The risk that the project Developed X The Private Partner will have principal The Contracting Authority will Developed market water
has not been designed responsibility for the adequacy of the generally provide minimum desalination projects benefit
adequately for the design of the facility and its compliance functional / performance from stable resource
purpose required. with the functional / performance specifications and require availability and defined design
Feasibility study. specification provided by the Contracting compliance with applicable legal standards which allow for
Authority. requirements and good industry increased innovation and
Approval of designs. practice standards. This allows efficiency gains.
Changes to design. design risk to the extent that the design is for private sector innovation and
dependent on interconnections for which efficiency gains in the detailed
the Contracting Authority retains design.
responsibility, such as the required output The Contracting Authority should
flow and pressure for the water delivery take time to ensure that the
pipe. minimum functional /
Authority at the end of the
project.
or its general freedom provided
that the minimum functional /
met.
Design risk The risk that the project Emerging X The Private Partner will have principal The Contracting Authority will In emerging markets, the
has not been designed responsibility for the adequacy of the require compliance with functional / performance
adequately for the design of the facility and its compliance applicable legal requirements specifications provided by the
with the functional / performance and good industry practice Contracting Authority (as well
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purpose required. specification provided by the Contracting standards. as design oversight) can often
Feasibility study. Authority. The Contracting Authority will stifle private sector innovation
The Contracting Authority will retain the also provide functional / and efficiency gains in the
Approval of designs. detailed design.
design risk to the extent that the design is performance specifications,
Changes to design. dependent on interconnections for which which can often be more Emerging market water
the Contracting Authority retains prescriptive than the Private desalination projects may be
responsibility, such as the required output Partner may anticipate. The particularly dependent on
flow and pressure for the water delivery Contracting Partner will often power availability, which has
pipe. prevent supplies being sourced implications for the Private
from certain jurisdictions. Partner’s ability to meet the
The Contracting Authority should Contracting Authority’s
take time to ensure that the anticipated availability and
functional / performance output requirements in order
specifications will provide a to meet its water supply
facility that will meet the obligations.
Contracting Authority’s
Authority at the end of the
project.
or its general freedom provided
that the minimum functional /
met.
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 interface risks solely through play at stages of the through robust pass through
work/related infrastructure work being contractual risk allocation, as the construction, testing and of obligations to credible and
Commissioning completed in which case risk could be financing cost / lost revenue commissioning process in experienced subcontractors
damage. shared. impact is typically very high terms of ensuring that any and by appropriate timetable
IP right The Private Partner takes labour dispute compared to the individual rights that it has to and budget contingency.
breach/infringement. risk unless such labour disputes are component parts of the project comment on design
political in nature or, in some jurisdictions, that can affect this. Ensuring development and testing
Quality assurance
nationwide. that the programme for results does not adversely
standards.
completion of the works has delay the project.
Defective material. The Private Partner also takes sufficient float periods for all
Subcontractor insolvency risk or the risk of Similarly the Contracting
Latent defects. critical stages and that parties Authority may need to
a dispute with its Subcontractor causing are incentivised to work together
Subcontractor delay. take responsibility for
to achieve the common delays caused by failure
disputes/insolvency. deadlines may be more effective
The Private Partner takes the risk of IP of public bodies to issue
Cost overruns where no
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compensation /relief right infringement. strategies. necessary consents in
event applies. The Private Partner is required to design good time.
and construct to good industry practice The Contracting Authority
standards and may be required to comply may seek to enter into
with or develop other quality assurance direct IP arrangements
programs or standards. with the
The Private Partner will generally have an designer/manufacturer to
obligation to rectify defects/defective work. ensure it retains
There may be some sharing of risk in necessary IP rights in the
respect of latent defects (for example, in event of Private partner IP
existing assets or where due to the nature infringement.
risk Interface/project construction risks, save for possibly through various means, (and the lenders) will Contracting Authority often
management. extreme forms of labour disputes which including ensuring that the have inspection, review has the right to step into the
can be construed as risk assumed by the Private Partner has the requisite and approval rights in project to remedy chronic or
Commissioning Contracting Authority in certain experience in the sector relation to the design and emergency situations and also
damage. circumstances or force majeure etc. (demonstrated over a lengthy the manufacture, to engage a replacement
IP right The concession agreement will typically period) and obtaining installation and erection of contractor to rectify, remedy or
breach/infringement. address construction risk as part of the appropriate security to the risk of plant and materials on address any issues, during the
termination regime. non-performance (for example, and off the site. construction (and operation)
Quality assurance
parent company guarantees, The Contracting Authority phase.
standards.
performance bonds and letters may provide time and
Defective material. of credit). cost relief in relation to
Latent defects. These mitigants can be certain types of extreme
Subcontractor instigated through the tendering, forms of labour disputes
disputes/insolvency. tender evaluation and due and also to step-in and
diligence process and by way of take over responsibility for
Cost overruns where no the security provisions in the the project in certain
compensation /relief relevant documentation. circumstances.
event applies.
extend completion date(s), the
right to terminate if the plant is
not operational by a nominated
Authority.
(including delay commissioning the responsibility for delay and cost overrun wish to implement a sectional may have a critical role to enforcement of construction
and cost asset on time and on risk. completion process to enable play at stages of the deadlines and budgets may
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Market Comparison
overrun) risk budget and the The principal risk arising out of delay will the facility to commence the construction, testing and be easier as the Private
consequences of be the loss of expected revenue, the supply of desalinated water commissioning process in Partner will typically have
missing either of those ongoing costs of financing construction before the end of the terms of ensuring that any more experience of the market
two criteria. and extended site costs. construction period for the entire rights that it has to and reliable resources.
Given the integrated nature of the water facility. This will also enable the comment on design
desalination facility, the Private Partner is Private Partner to begin development and testing
best placed to provide all procurement, receiving payment for its design results do not adversely
construction and commissioning of the and construction services once delay the project.
entire facility. This is generally managed sections of the project are The Contracting Authority
through the engagement of a single EPC substantially completed and to will generally allow for
contractor or EPC consortium. mitigate its exposure to delays certain relief events, delay
that would otherwise impact the events or force majeure
The Private Partner will be expected to entire facility. This can help
demonstrate that the facility is events where delays or
increase cash flow during cost overruns have arisen
substantially complete and meets the construction, reduce the Private
minimum performance levels before it is from either the fault of the
Partner’s financing costs, reduce Contracting Authority, or
given permission to enter into commercial the Private Partner’s
operation. Water desalination projects no-fault events.
contingencies for delay within
require detailed commissioning and construction costs and minimise Similarly the Contracting
testing regimes to ensure that the facility risk of delays impacting the Authority may need to
meets the output, water quality, efficiency Contracting Authorities ability to take responsibility for
and environmental requirements set by satisfy water demand. Financial delays caused by the
the minimum functional / performance penalties and liquidated failure of public bodies to
specifications. damages can help enforce issue necessary consents
If additional interconnection facilities are construction deadlines. in good time.
required for the project (such as a new The combination of (i) incentives
substation to supply electricity or or penalties for timely completion
extensions to the water transmission and (ii) the implementation of a
network), construction of these additional “longstop date” (a date which is
facilities may also be included within the pegged to a prescribed time
Private Partner’s scope of responsibility, period after the scheduled
transferring the risk of delays and cost completion date) will create the
overruns in the construction to the Private necessary tension to incentivize
Partner. Subject to relevant regulatory timely completion while allowing
framework, ownership and responsibility the Private Partner a reasonable
for operation and maintenance of these amount of time to meet its
facilities may be transferred to the contractual responsibilities in
Contracting Authority on completion of spite of delays before the
construction and commissioning, subject Contracting Authority can
to the Private Partner’s defect rectification terminate the project.
period. Separate testing and taking over If the Contracting Authority is
requirements are generally set out for responsible for providing or
connection facilities transferred to the procuring any interconnection
Contracting Authority on completion. facilities, the Contracting
Authority should ensure that
If associated infrastructure and those facilities are procured in
interconnection facilities are the good time.
responsibility of the Contracting Authority,
these will need to be the subject of a firm
timetable with relief/compensation for the
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Private Partner for delay.
Completion The risk of Emerging X The Private Partner will bear principal The Contracting Authority may The Contracting Authority In emerging market
(including delay commissioning the responsibility for delay and cost overrun wish to implement a sectional may have a critical role to desalination projects, there is
and cost asset on time and on risk. completion process to enable play at stages of the increased risk of delays
overrun) risk budget and the The principal risk arising out of delay will the facility to commence the construction, testing and arising from unanticipated
consequences of be the loss of expected revenue, the supply of desalinated water commissioning process in challenges in construction and
missing either of those ongoing costs of financing construction before the end of the terms of ensuring that any unreliable resources. The
two criteria. and extended site costs. construction period for the entire rights that it has to Contracting Authority will need
facility. This will also enable the comment on design to be prepared to enforce its
Given the integrated nature of the water Private Partner to begin development and testing rights to manage the
desalination facility, the Private Partner is receiving payment for its design results do not adversely consequences of a failure by
best placed to provide all procurement, and construction services once delay the project. the Private Partner to meet
construction and commissioning of the sections of the project are the construction milestones.
entire facility. This is generally managed The Contracting Authority
substantially completed and to will generally allow for The management of
through the engagement of a single EPC mitigate its exposure to delays completion risk is typically
contractor or EPC consortium. certain relief events, delay
that would otherwise impact the events or force majeure addressed by having either: (i)
The Private Partner will be expected to entire facility. This can help events where delays or a scheduled completion date
demonstrate that the facility is increase cash flow during cost overruns have arisen (with attached liquidated
substantially complete and meets the construction, reduce the Private from either the fault of the damages for delay) followed
minimum performance levels before it is Partner’s financing costs, reduce Contracting Authority, or by a fixed period for operation
given permission to enter into commercial the Private Partner’s no-fault events. under the water purchase
operation. Water desalination projects contingencies for delay within agreement commencing on
require detailed commissioning and construction costs and minimise Similarly the Contracting the actual completion date, or
testing regimes to ensure that the facility risk of delays impacting the Authority may need to (ii) the scheduled construction
meets the output, water quality, efficiency Contracting Authorities ability to take responsibility for period forming part of the fixed
and environmental requirements set by satisfy water demand. Financial delays caused by the operation period (with
the minimum functional / performance penalties and liquidated failure of public bodies to extensions for certain events
specifications. damages can help enforce issue necessary consents such as force majeure). With
construction deadlines. in good time. the latter scenario, in
If additional interconnection facilities are
The combination of (i) incentives emerging markets, the
required for the project (such as a new
or penalties for timely completion Contracting Authority may
substation to supply electricity or
and (ii) the implementation of a attempt to additionally impose
extensions to the water transmission
“longstop date” (a date which is delay liquidated damages on
network), construction of these additional
pegged to a prescribed time the Private Partner. However
facilities may also be included within the
Private Partner’s scope of responsibility, period after the scheduled
completion date) will generally assessed against the
transferring the risk of delays and cost
create the necessary tension to likelihood that genuine out-of
overruns in the construction to the Private
incentivize timely completion pocket costs will actually be
Partner. Ownership and responsibility for
while allowing the Private incurred for such delay, so as
operation and maintenance of these
Partner a reasonable amount of to avoid unnecessary
facilities will be transferred to the
time to meet its contractual contingency being built into
Contracting Authority on completion of
responsibilities in spite of delays the project.
construction and commissioning (or
following a limited operation period), before the Contracting Authority
subject to the Private Partner’s defect can terminate the project.
rectification obligations during the If the Contracting Authority is
prescribed warranty period. Separate responsible for providing or
testing and taking over requirements are procuring any interconnection
generally set out for connection facilities facilities, the Contracting
transferred to the Contracting Authority on Authority should ensure that
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completion. those facilities are procured in
If associated infrastructure and good time.
interconnection facilities are the The Contracting Authority may
responsibility of the Contracting Authority, also require the right to step-in
these will need to be the subject of a firm and assume the responsibilities
timetable with relief/compensation for the of the Private Partner in certain
Private Partner for delay. limited circumstances. This right
is rarely exercised. The
Contracting Authority may also
require a ‘look forward’
termination test to ensure that it
can pre-emptively terminate the
concession agreement if
significant delay is anticipated.
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
price risk is unable to achieve the achieving the performance specification Contracting Authority to draft performance indicators formulation of appropriate
output specification such as water quality specifications and attainable standards based on cannot be met due to specifications and the private
metrics and the price or guaranteed water capacity. relevant market data and actions by the Contracting sector’s ability to manage
cost of doing so. The Contracting Authority bears the risk of requirements and policy Authority or unforeseen performance to those
enforcing the regime and for ensuring that objectives. Performance based circumstances, the specifications will be more
the output specification is properly tailored on reliability, demonstrated Private Partner may be manageable.
to what the Private Partner can deliver. water capacity and water eligible to seek relief
availability, can be measured and/or compensation.
against pre-determined
schedules or standards.
The relevant project documents
will contain clear key
performance indicators, output
specifications, appropriate
financial damages for non-
performance and transparent
levels at which the service
should be undertaken, the
Contracting Authority focuses on
the precise service it wishes to
procure and refines the
tests, performance tests,
performance standards and
intake water quality
requirements) with the bidders
during the bid phase. These
performance levels, once
negotiated, constitute a key
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mechanism.
Penalty deductions from
Capacity Payments for de-rating
and outages are included in the
concession agreement to
support achievement of the
performance standards.
Performance/ The risk that the asset Emerging X The Private Partner bears the risk of The onus falls upon the Where certain For emerging markets,
price risk is unable to achieve the achieving the performance specification Contracting Authority to draft performance indicators particularly in the case of
output specification such as water quality specifications and attainable standards based on cannot be met due to market first projects, the
metrics and the price or guaranteed water capacity. relevant market data and actions by the Contracting preparation of attainable
cost of doing so. The Contracting Authority bears the risk of requirements and policy Authority or unforeseen standards by the Contracting
enforcing the regime and for ensuring that objectives. Performance based circumstances, the Authority is complicated by the
the output specification is properly tailored on reliability, demonstrated Private Partner may be lack of relevant and/or
to what the Private Partner can deliver. water capacity and water eligible to seek relief historical market data.
availability, can be measured and/or compensation.
Consideration needs to be given to the against pre-determined
ability of the Private Partner to achieve the schedules or standards.
necessary performance levels given the
nature of the project and the emerging The Private Partner (and the
market in which it will be based. lenders and their technical
advisers) will carefully review the
proposed output specification in
order to ensure that it is
achievable. The Private Partner
will test the proposed output
specification during the bid
clarification period (and
sometimes even during the
negotiation period post-bid
submission).
The relevant project documents
levels at which the service
should be undertaken, the
Contracting Authority focuses on
the precise service it wishes to
procure and refines the
tests, performance tests,
performance standards and
intake water quality
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requirements) with the bidders
during the bid phase. These
performance levels, once
negotiated, constitute a key
mechanism.
Penalty deductions from
Capacity Payments for de-rating
and outages are included in the
concession agreement to
support achievement of the
performance standards.
Resource or The risk that the supply Developed X The main input or resource required for a The Private Partner may be Where certain Developed markets generally
input risk of inputs or resources desalination facility is seawater. The incentivized, through a sharing performance indicators do not experience market
required for the Contracting Authority generally bears mechanism, to achieve certain cannot be met due to volatility to the extent of
operation of the project primary responsibility in the event that efficiencies in energy contaminated intake or emerging markets, and
is interrupted or the intake water is contaminated. The other consumption throughout the shortage of water, the resource availability is less of
cost increases. main input or resource required for a concession period. Private Partner may be a concern, however energy
desalination facility is power. The eligible to seek relief costs may still vary
Contracting Authority typically bears the and/or compensation. significantly over the course of
primary responsibility to ensure an The cost of power is project that must be
uninterrupted supply of power to the generally a pass-through accounted for.
facility. The price of electricity or gas is cost with the Contracting
often a pass-through cost. Authority bearing the cost
of any adjustments in the
price, subject to any
energy usage efficiency
sharing mechanism.
Resource or The risk that the supply Emerging X The main input or resource required for a The Private Partner may be Where the Contracting Emerging markets are
input risk of inputs or resources desalination facility is seawater. If the incentivized, through a sharing Authority bears the risk of generally more susceptible to
required for the Contracting Authority is responsible for mechanism, to increase providing seawater, contamination events and
operation of the project providing seawater, then the Contacting efficiencies in energy certain performance electricity and water
is interrupted or the Authority will generally bear primary consumption throughout the indicators cannot be met availability may be less
cost increases. responsibility in the event that intake water concession period. due to contaminated reliable.
is contaminated. If the Private Partner In emerging markets, the Private intake or shortage of
bears responsibility for procuring Partner is generally unable to water, the Private Partner
seawater, then the Private Partner will pass any cost increases through may be eligible to seek
general bear primary responsibility in the to an end user. relief and/or
event that the intake water is compensation.
contaminated. The cost of power is
The other main input or resource required generally a pass-through
for a desalination facility is power. The cost with the Contracting
Contracting Authority typically bears the Authority bearing the cost
primary responsibility to ensure an of any adjustments in the
uninterrupted supply of power to the price, subject to any
facility. The price of electricity or gas is energy usage efficiency
often a pass-through cost. mechanism.
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Market Comparison
Demand risk The availability by both Developed X In the majority of developed world The Contracting Authority should As the Contracting In developing markets, the
volume and quality desalination projects, demand risk will be do a full assessment of demand Authority will be retaining Contracting Authority should
along with taken by the Contracting Authority with the as part of the project feasibility demand risk, it will need have access to various data
transportation of Private Partner remunerated on an study to ensure that the plant is to ensure that it is sources to develop accurate
resource or inputs to a availability basis. Water resource risk is appropriately sized. comfortable (both consumption forecasts, such
project or the demand also likely to be borne by the Contracting politically and that the Contracting Authority
for the product of Authority. economically) with is well placed to manage
service of a project by demand forecasts. potable water demand.
consumers/users
Demand risk The availability by both Emerging X The default position for desalination The Contracting Authority should As the Contracting For emerging markets,
volume and quality projects in emerging markets is that the do a full assessment of demand Authority will be retaining particularly in the case of
along with Contracting Authority is a monopoly off- as part of the project feasibility demand risk, it will need market first projects, the
transportation of taker and will guarantee the purchase of study to ensure that the plant is to ensure that it is preparation of demand profiles
resource or inputs to a all water output. Water resource risk is appropriately sized. comfortable (both by the Contracting Authority is
project or the demand also likely to be borne by the Contracting politically and complicated by the lack of
for the product of Authority. economically) with relevant and/or historical
service of a project by demand forecasts. market data.
consumers/users The high incidence of delayed
project execution in emerging
Regimes for plant expansion
are often drafted into the
concession agreement in
order to facilitate quick and
efficient project expansion.
Maintenance The risk of maintaining Developed X As owner and operator of the facility until The Contracting Authority should Generally speaking, the In developed markets, the
risk the asset to the its transfer to the Contracting Authority at take time to ensure that the Contracting Authority’s involvement of the Private
appropriate standards the end of the project, the Private Partner water purchase agreement role is limited to defining Partner in the operation and
and specifications for will have responsibility for meeting the properly defines the minimum maintenance maintenance of the project
the life of the project. maintenance requirements defined by the maintenance obligations on the requirements and provides several benefits by
Incorrect estimates and Contracting Authority during the bidding Private Partner to ensure that ensuring that these are incentivizing greater care and
cost overruns. process (for example, for reverse osmosis the facility is properly maintained met. diligence by the Private
technologies specific requirements may throughout the life of the project, The Contracting Authority Partner in the construction
be included for operation and to ensure that the facility is in a may be required to phase to ensure the
maintenance agreements with third parties satisfactory condition in the maintain interconnections operational life of the facility
demonstrating relevant expertise and event of early termination or on with the facility, such as and that operation and
and/or for membrane supply expiry of the agreement, at the water transmission maintenance considerations
arrangements) and/or in the water which point the facility will be system. are appropriately considered
purchase agreement. In addition to transferred to the Contracting in the design of the facility.
specific maintenance requirements Authority. The Contracting
imposed by the Contracting Authority, the Authority should also consider
Private Partner will be responsible for whether any long term services
maintaining the facility so as to meet the or supplies should be secured
contractual levels of availability and output for the facility.
required to secure its revenue stream. Subject to the requirements of
The Private Partner generally assumes the Private Partner’s financing
Government Support
Market Comparison
the risk of all maintenance, including parties, the Contracting Authority
periodic and preventative maintenance, should consider specific
emergency maintenance work, work requirements in relation to the
stemming from design or construction use of property damage
errors and rehabilitation work. insurance to reinstate the facility.
Maintenance events affecting the Adequate performance by the
availability of the facility are generally Private Partner will be further
scheduled by agreement with the enforced by ensuring that the
Contracting Authority and scheduled payment mechanism reflects the
maintenance may be prohibited during Private Partner’s ability to meet
seasons of peak demand. the contractual levels (in volume
The Contracting Authority generally and quality) of availability and
retains the risk of certain events impacting output and by including
the project (such as political risk and termination triggers for material
regulatory / change in law risk), in which performance shortfalls.
case the Contracting Authority may be There may also be specific
required to provide relief to the Private transfer provisions providing for
Partner for the impacts on the project of the condition of the facility to be
additional maintenance required by those assessed during the last few
events (including the additional costs of years of the project. The Private
maintenance), but responsibility for Partner will then be required to
performance of the maintenance remains carry out any remedial work
with the Private Partner. necessary to ensure that the
The Contracting Authority may retain the facility meets the required
maintenance risk associated with the standards on the date of transfer
infrastructure connecting with the facility, to the Contracting Authority at
such as the water delivery pipe taking the end of the project.
water from the facility’s delivery point.
Maintenance The risk of maintaining Emerging X As owner and operator of the facility until The Contracting Authority should Generally speaking, the In emerging markets, the
risk the asset to the its transfer to the Contracting Authority at take time to ensure that the Contracting Authority’s involvement of the Private
appropriate standards the end of the project, the Private Partner water purchase agreement role is limited to defining Partner in the operation and
and specifications for will have responsibility for meeting the properly defines the minimum maintenance maintenance of the project
the life of the project. maintenance requirements defined by the maintenance obligations on the requirements and secures the expertise of the
Incorrect estimates and Contracting Authority during the bidding Private Partner to ensure that ensuring that these are Private Partner for the life of
cost overruns. process (for example, for reverse osmosis the facility is properly maintained met. the project, in addition to
technologies specific requirements may throughout the life of the project, The Contracting Authority incentivizing greater care and
be included for operation and to ensure that the facility is in a may be required to diligence by the Private
maintenance agreements with third parties satisfactory condition in the maintain interconnections Partner in the construction
demonstrating relevant expertise and event of early termination or on with the facility, such as phase to ensure the
and/or for membrane supply expiry of the agreement, at the water transmission operational life of the facility
arrangements) and/or in the water which point the facility will be system. and that operation and
purchase agreement. In addition to transferred to the Contracting maintenance considerations
specific maintenance requirements Authority. The Contracting are appropriately considered
imposed by the Contracting Authority, the Authority should also consider in the design of the facility.
Private Partner will be responsible for whether any long term services In emerging markets, the
maintaining the facility so as to meet the or supplies should be secured Contracting Authority should
contractual levels of availability and output for the facility. consider its ability to take on
required to secure its revenue stream. Subject to the requirements of responsibility for maintenance
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Market Comparison
The Private Partner generally assumes the Private Partner’s financing following the transfer of the
the risk of all maintenance, including parties, the Contracting Authority facility on early termination or
periodic and preventative maintenance, should consider specific expiry and whether provisions
emergency maintenance work, work requirements in relation to the should be put in place to
stemming from design or construction use of property damage support the necessary transfer
errors and rehabilitation work. insurance to reinstate the facility. of expertise and/or personnel
Maintenance events affecting the Adequate performance by the in the short term.
availability of the facility are generally Private Partner will be further
scheduled by agreement with the enforced by ensuring that the
Contracting Authority and scheduled payment mechanism reflects the
maintenance may be prohibited during Private Partner’s ability to meet
seasons of peak demand. the contractual levels (in volume
The Contracting Authority generally and quality) of availability and
retains the risk of certain events impacting output and by including
the project (such as political risk and termination triggers for material
regulatory / change in law risk), in which performance shortfalls.
case the Contracting Authority may be There may also be specific
required to provide relief to the Private transfer provisions providing for
Partner for the impacts on the project of the condition of the facility to be
additional maintenance required by those assessed during the last few
events (including the additional costs of years of the project. The Private
maintenance), but responsibility for Partner will then be required to
performance of the maintenance remains carry out any remedial work
with the Private Partner. necessary to ensure that the
The Contracting Authority may retain the facility meets the required
maintenance risk associated with the standards on the date of transfer
infrastructure connecting with the facility, to the Contracting Authority at
such as the water delivery pipe taking the end of the project.
water from the facility’s delivery point.
occur that are beyond that entitle 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 could include: force majeure risks that cause following a force majeure compensates the Private
parties and delay or physical damage. event, an amount of Partner, only for its
prohibit performance. - natural force majeure events, which compensation should outstanding debt (but not for
the risk of disruption as a result continue to be payable by its expected rate of return) for
fire, earthquake, tsunami, flood, cyclone, the Contracting Authority termination arising from a
mitigated by relaxing the to the Private Partner in “natural” force majeure.
epidemic or plague, accidents or order to service the
paying the Private Partner for Private Partner’s debt
- other force majeure events which actual water availability during obligations during the
typically cannot be insured (often the force majeure event and course of the event.
described as ‘political force majeure’ relieving it from any penalties for Where the project is
events) (e.g. war within the jurisdiction, consequent inability to perform). terminated, in some
strikes / protest, terrorism, riots etc). jurisdictions the
In some jurisdictions the project Contracting Authority may
The Private Partner will generally be may be subject to abatement but be required to fully
entitled to an extension of time (but not excused from non- compensate the Private
Partner for debt owed to
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Market Comparison
and additional costs only in the event of a performance/breach. the lenders. Whether the
political force majeure, but an extension of debt will be kept whole in
time only in the event of a natural force such a scenario, will be a
majeure. key area of focus for
revenue commencement. The ability of assessments.
certain period of time or level of loss has
been exceeded.
tariff to the extent of its availability. In the
event of a political force majeure event,
the Private Partner would be entitled to
the tariff on the basis of the availability of
the plant as tested by the last availability
test.
In the event of a prolonged force majeure
event, the Contracting Authority would
generally have the right to terminate. The
Private Partner would generally expect to
receive more equity return than for
termination for a ‘natural’ force majeure
event.
Force majeure The risk that Emerging X Force majeure is a shared risk and there Project insurance (physical See comments on the risk On emerging market
risk unexpected events will be a fairly well developed list of events damage and loss of revenue of uninsurability for a transactions, the Contracting
occur that are beyond that entitle the Private Partner to relief. coverage) is the key mitigant for Desalination Plant Authority often does not
the control of the Typical events could include: force majeure risks that cause projects in emerging provide any compensation for
parties and delay or physical damage. markets. termination arising from a
prohibit performance. - natural force majeure events, which “natural” force majeure, on the
the risk of disruption as a result grounds that this should be
fire, earthquake, tsunami, flood, cyclone, insured. In the event of
mitigated by relaxing the prolonged force majeure, the
epidemic or plague, accidents or Contracting Authority will be
requiring a lower level of entitled to terminate.
- other force majeure events which availability without incurring
typically cannot be insured (often performance penalties).
described as ‘political force majeure’
events) (e.g. war within the jurisdiction,
strikes / protest, terrorism, riots etc).
The Private Partner will generally be
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Market Comparison
majeure.
certain period of time or level of loss has
been exceeded.
Private Partner would be entitled to start
receiving the tariff to the extent of its
availability. In the event of a political force
majeure event, the Private Partner would
be entitled to start receiving the tariff on
In the event of a prolonged force majeure
event.
Exchange and The risk of currency Developed X Currency fluctuations and interest rate The Private Partner would look The Contracting Authority In developed markets, the risk
interest rate risk fluctuations and or the fluctuation risks will generally be borne by to mitigate this risk through is not expected to assist of currency fluctuations and
interest rate over the the Private Partner. hedging arrangements under the the Private Partner in interest rates is generally not
life of a project Finance Documents, to the mitigating such risks. substantial enough to require
extent possible in that market. However in some the Contracting Authority to
circumstances the provide support.
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 Contracting Authority would The Private Partner would look As the tariff will be paid in In emerging markets, the risk
interest rate risk fluctuations and or the specifically prohibit the Private Partner to mitigate this risk through local currency, the of currency fluctuations is
interest rate over the from claiming additional costs in the event hedging arrangements under the Contracting Authority may often a key bankability issue.
Government Support
Market Comparison
life of a project of general currency and interest rate Finance Documents, to the retain the risk of Issues of convertibility of
fluctuations, although certain elements of extent possible in that market. devaluation of the local currency and restrictions on
the tariff may be adjusted for fluctuations In certain countries, this may not currency to the extent that repatriation of funds are also
between the local currency and USD (eg be possible due to exchange / such devaluation impacts bankability issues upon
in de-pegging scenario). interest rate volatility or due to on the economic viability termination in emerging
the lack of hedging markets for of the project (due to the markets.
pegged currencies. need to pay for foreign
currency imports and
service foreign currency
debt).
parties may agree to negotiate in good become unavailable for the insurance, in particular unattainable and insurance
faith risk allocation going forward, while project given the location and where this has been coverage should be less
allowing for the termination of the project if other relevant factors. caused by in-country or volatile than for emerging
an agreement cannot be reached. The regional events or markets, this is typically a
Contracting Authority may choose to circumstances. shared risk. However in some
assume responsibility for the uninsurable developed jurisdictions
risk, while requiring the Private Partner to uninsurable risk may remain
regularly approach the insurance market with the private sector.
to obtain any relevant insurance. Where the cost of the required
If the uninsured risk is fundamental to the insurance increases
project (e.g. physical damage cover for significantly, the risk is
major project components) and the parties typically shared by having
are unable to agree on suitable either an agreed cost
arrangements then the Private Partner escalation mechanism up to
may need an exit route (e.g. termination of ceiling or a percentage
the project on the same terms as if it were sharing arrangement - this
an event of force majeure) if it cannot allows the Contracting
reinstate the project on an economic Authority to quantify the
basis. contingency that has been
In circumstances where the
option either to terminate the
Insurance risk The risk that insurance Emerging X Where risks become uninsurable (i.e. not As part of the feasibility study, The Contracting Authority On emerging market
becomes unavailable. terms in the international insurance Private Partner should consider whether it stands behind Authority typically does not
market) there is typically no obligation to whether insurance might unavailability of take the risk of uninsurability
maintain insurance for such risks. become unavailable for it given insurance, in particular arising on the project,
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Market Comparison
If an uninsured risk event occurs, the the location and other factors where this has been although there are good
Private Partner will typically have to bear relevant to the project. caused by in-country or grounds to say that it should
this risk, although sometimes the regional events or do so if the Private Partner
Contracting Authority becomes the insurer circumstances. has no protection for the
of last resort. consequences of a natural
If the uninsured risk is fundamental to the force majeure that becomes
project (e.g. physical damage cover for uninsurable.
basis.
Private Partner with the license and involve a breach of obligations or debt and equity. political risk insurance is not
access to the system and surrounding interference by the Contracting typically obtained.
lands necessary to allow the Private Authority with the project.
Partner to fulfil its obligations.
discrimination, seizure the Private Partner’s control. Government departments keep termination right for the cover themselves by use of
or expropriation of the This concept may include any act or in line with the project objectives Private Partner and the political risk insurance, leaving
project. omission of any Government entity which and will need to actively manage Contracting Authority will this risk to be managed by the
may have a material adverse impact on the various stakeholders in the need to stand behind debt insurer against the
the Private Partner’s ability to perform its project to achieve this. and equity. Contracting Authority.
obligations and/or exercise its rights under
the concession.
Regulatory/chan The risk of law Developed X The risk of change in law sits mostly with The Private Partners’ entitlement Past concession models In developed markets change
ge in law risk changing and affecting the Contracting Authority but there will be to relief may be subject to (including that developed in law risk is likely to be of less
the ability of the project a degree of risk sharing in the following minimum thresholds. in the UK) used to require concern to Private Partners,
to perform and the price manner: the Private Partner to although Private Partners will
at which compliance The Private Partner will be kept whole in assume, and price for, a still expect protection against
with law can be respect of changes in law which are: (i) specified level of general discriminatory change in law
maintained. Discriminatory (to the project or the change in law capex risk and, in some jurisdictions,
Change in taxation. Private Partner) (ii) specific (to the water during the operational general change in law which
sector or to PPP projects in the period, before has material cost impact.
jurisdiction) or (iii) general change in law compensation would be
affecting capital expenditures. A change paid. The UK Government
in law is often subject to a de minimis ultimately decided that
threshold before the Private Partner is this allocation did not
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Market Comparison
entitled to compensation represent value for money
The Private Partner will not be and reversed this
compensated for general changes in law position. Some countries
that only affect operational expenditure or which adopted the SOPC
taxation (i.e. affect the market equally). model had already taken
Changes in law will always entitle the this approach.
Private Partner to a Variation where this is Accordingly the
necessary to avoid an impossible Contracting Authority
obligation. If this cannot be achieved the should be mindful of how
Private Partner will typically be entitled to it will fund these changes
terminate as if a Contracting Authority should they arise. The
breach had occurred. regulation of water pricing
for consumers may
impact on the extent and
timing of ultimate pass
through to end users.
and (iv) a change in the grid code or water the concept of Private not generally have to prove
code. Partner immunity from that it could have anticipated
(c) changes in the
internationally and changes in
the exchange rate between
local currency and USD are
often specifically excluded as
changes in law. This reflects
both the Contracting
Authority’s expectations about
the Private Partners (ie as
international developers,
Government Support
Market Comparison
contractors and operators)
and the developing nature of
legislative reform in these
areas.
Inflation risk The risk that the costs Developed X Inflation risks during construction are The Private Partner will look to The payment mechanism In developed markets, inflation
of the project increase typically borne by the Private Partner, be kept neutral in respect of both incorporates indexation is typically minimal and does
more than expected. while inflation risks during the concession international and local for inflation costs by not experience fluctuations to
term will typically be primarily borne by the inflationary costs through an incorporating the the extent of emerging
Contracting Authority. appropriate inflation uplift or tariff consumer price index into markets.
On availability-based projects, during the adjustment regime. the monthly payments.
concession term, the availability payment
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.
Inflation risk The risk that the costs Emerging X Inflation risk is typically borne by the The Private Partner will look to The payment mechanism The fluctuation of inflationary
of the project increase Contracting Authority by way of tariff be kept neutral in respect of both incorporates indexation costs is a greater risk in
more than expected. adjustment in operation phase. international and local for inflation costs by emerging markets than it is in
On availability-based projects, the inflationary costs through an incorporating the developed markets and the
availability payment will typically include appropriate inflation uplift or tariff consumer price index into Private Partner’s expectation
both a fixed component (where debt has adjustment regime. the monthly payments. will be that this risk is borne
been hedged) and a variable component and managed by the
(to reflect variable financing costs and Contracting Authority during
variable inputs such as labour and the concession term.
chemicals). Indexation for inflation is
typically linked to local
consumer index. In emerging
markets, local consumer index
lack independence and are
sometimes manipulated by the
Government for fiscal and
social reasons.
Strategic risk Change in shareholding Developed X The Contracting Authority wants to ensure The Contracting Authority will In developed markets the
of Private Partner. that the Private Partner to whom the limit the Private Partner’s Private Partners’ desire for
Conflicts of interest project is awarded remains involved. shareholder’s ability to change certainty of involvement of key
between shareholders Any bid will be awarded on the basis of their shareholding for a period participants will need to be
of Private Partner. the Private Partner’s technical expertise (i.e. there is typically a lock-in for balanced with the private
and financial resources and for this reason at least the construction period) sector’s requirements for
the sponsors of the Private Partner should and thereafter may impose a flexibility in future business
remain involved in the project. regime restricting change in plans, particularly in the equity
control without consent or where investor markets.
met.
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Market Comparison
Conflicts of interest resources. The Contracting Authority change shareholding for a period typically more restrictive and
between shareholders wants to ensure that the sponsors, (i.e. lock-in for construction longer than in developed
of Private Partner. particularly founding sponsors, to whom period). markets.
the project is awarded remains involved Pre-tender proposal should set
(for sometimes up to 7 years after out proposals for governance of
commercial operation). Private Partner.
The Contracting Authority will typically
enter into a shareholders’ agreement or
founders’ agreement with the Private
Partner. Often Government entities will
take a shareholding in the project
company. In some jurisdictions there is an
obligation on the project company to offer
a certain percentage of its shares to the
public via an initial public offering.
Disruptive The risk that a new Developed X The technology will usually be specified by The Contracting Authority should The concession contract As these types of projects
technology risk emerging technology the Contracting Authority in the minimum do a full assessment of relevant will usually contain a utilise very specialised
unexpectedly displaces functional specification. technologies as part of the variation clause (if technology, requirements for
an established project feasibility study to ensure permitted by local law) the Private Partner to take on
technology. that the selected technologies which would provide for obligations to take advantage
are appropriate to the conditions both Contracting Authority of, or use, new technology are
of the project and market tested. and Private Partner- unlikely.
The Private Partner will often be proposed variations to the
encouraged to identify any minimum functional
issues with the selected specification.
technology during the bid phase
and to submit an alternative bid
based on alternative technology.
Disruptive The risk that a new Emerging X The technology will usually be specified by The Contracting Authority should The concession contract In emerging markets, this risk
technology risk emerging technology the Contracting Authority in the minimum do a full assessment of relevant will usually contain a is not typically addressed in
unexpectedly displaces functional specification. technologies as part of the variation clause (if the project documents.
an established project feasibility study to ensure permitted by local law) Contracting Authorities often
technology. that the selected technologies which would provide for seek alternative bids in order
are appropriate to the conditions both Contracting Authority to consider alternative
of the project and market tested. and Private Partner- technology proposals. As
The Private Partner will often be proposed variations to the project implementation and
encouraged to identify any minimum functional execution are often delayed in
issues with the selected specification. emerging markets, the risk of
technology during the bid phase technology change could be
and to submit an alternative bid considered higher than in
based on alternative technology. developed markets.
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Market Comparison
calling a default
termination scenario (other than Private
Partner default) and for rights of set-off
below that figure to be restricted.
compensation) the monetary (a) uncertainty about the type and timing Partner’s obligations at the end a higher level of Contracting Authority’s
risk consequences of such of transfer of the plant (either back to of the concession period (due to Government (eg the payment obligations.
termination the Contracting Authority or to a expiry or termination). Ministry of Finance) to Political risk insurance may be
replacement Private Partner); These matters can be addressed guarantee the level of available and is likely to be
in the concession agreement compensation payable on sought to cover the risk of the
(b) re-delivery of poor condition or out- termination.
of-specification facilities; and should deal with redelivery Contracting Authority or
obligations, compensation The lenders will require Government guarantor
(c) receiving inadequate compensation (either on a net book value or direct agreements with defaulting on its payment
for non-performance and early present market value basis), the Contracting Authority obligation.
termination (if applicable); access to warranties and giving the lenders step-in
(d) inability to obtain the benefit of guarantees and transfer of rights in the case of the
supply/manufacturer warranties; and operation and maintenance Contracting Authority
know-how. calling a default
(e) other related political and public
A further key mitigant is to make termination or in the event
relations issues.
Government Support
Market Comparison
The level of compensation payable on sure the termination triggers are of the Private Partner
early termination will depend on the not hair triggers and that there being in default under the
reasons for termination. are adequate well-defined routes loan documentation. The
(1) Private Partner right to terminate, such for each party to remedy any lenders would typically be
as for (a) non-payment of capacity and alleged default. given a grace period to
output payments for typically between 30- gather information,
60 days; (b) nationalisation or manage the project
expropriation of the plant; (c) prolonged company and seek a
events of Government action or inaction / resolution or ultimately
Government/buyer risk events which novate the project
continue for 365 days (unless the documents to a suitable
Contracting Authority elects to continue substitute concessionaire.
making capacity payments).
The Private Partner will typically receive
full repayment of senior debt, and a fixed
rate of return on equity contributions and
an amount based on future predicted cash
flows plus termination costs.
(2) Contracting Authority right to
terminate, such as for (a) when
commercial operation date is not achieved
within a certain period from scheduled
commercial operation (generally 200
days); (b) wilful default and material
default; (c) failure to remedy defects; (d)
failure to pay LDs; (e) reduction of
average availability of the plant; (f)
termination of desalination licence or land
rights; prolonged (typically 365 days)
events of Government action or inaction /
Government/buyer risk events.
The Private Partner will receive full
repayment of senior debt only.
(3) prolonged force majeure
The Private Partner will receive full
repayment of senior debt, equity
contributions less equity dividends and
termination costs. If the relevant force
majeure event is ‘political’, then the
Private Partner will also often be entitled
to a capped equity return.
Government Support
Market Comparison
these circumstances (ie the Contracting
Authority has a discretion as to whether to
terminate), 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.
In some emerging markets, the Private
Partner is contractually prohibited from
terminating in the certain circumstances.
Risk Matrix 11: Water distribution project (ROT) 229
Risk Matrix 11: Water distribution (ROT)

 Water distribution project for an existing utility as a ROT project where the wholesale supplier of water is a state owned entity and the water tariffs are set under the
terms of the concession
 Key risks

 Maintenance risk
 Strategic risk
Government Support
Market Comparison
Land purchase The risk of acquiring Developed X The Contracting Authority bears the The Contracting Authority should The Contracting Authority Land and access rights and
and site risk title to the land to be principal risk for ensuring that the required undertake detailed ground, may need to use its ground conditions in
used for a project, the land interests in the sites designated for environmental and social legislative powers to developed markets are
selection of that site the project are within its ownership or assessments and should obtain and then secure typically more established and
and the geophysical control, or that it has sufficient legal rights disclose such information to the the sites and easements risks can be mitigated with
and hydrological (contractual or statutory) over them to Private Partner as part of the (e.g. through appropriate due diligence with
conditions of that site. enable this to occur. bidding process. expropriation / relevant land registries and
Planning permission. The land interests may be provided by the The Contracting Authority should compulsory acquisition). utility records. Where there
Contracting Authority to the Private also undertake detailed site Even where there is a are deficiencies, these can
Access rights. often be easily cured through
Partner, if it has or has acquired the surveys to identify the location of legally clear site,
Security. relevant land rights (through contract or the existing assets and to Government enforcement the exercise of statutory
statute), or a third party landowner who confirm, or otherwise, that the powers may be needed to powers for acquisition and
Heritage.
has agreed to grant the relevant land existing assets are located on properly secure the site access.
Archaeological.
rights. As the project will be transferred to the sites and within the for the project. There may The Private Partner’s
Pollution. the Contracting Authority at the end of the easements that it owns or be historic encroachment obligations with regards to
Latent defects. agreed term, the land rights are usually controls. issues that the Private indigenous rights are
granted to the project under lease or The Contracting Authority should Partner cannot be generally well legislated in
similar arrangements. allow access to the Private expected to deal with. developed markets, for
Additionally, the Contracting Authority Partner during the bidding This may particularly be example the requirement to
bears the principal risk of ensuring that the process to carry out its own the case in relation to the enter into indigenous land use
existing assets are located on the sites surveys of the sites and the pipe network. agreements under native title
and within the easements that it owns or existing assets. Examples include the legislation in Australia and the
controls. need to manage the equivalent under first nations
The Contracting Authority law in Canada.
The Private Partner will be responsible for should, to the greatest extent relocation of people,
assessing the adequacy of the sites possible, ensure that it has a either permanently or
designated by the Contracting Authority complete understanding of the temporarily and continued
and the land rights granted (including any risks involved in securing the site efforts to manage the
associated easements and access rights) and the site constraints that may social and political impact
and any restraints that the designated impact on the rehabilitation and of the project on and
sites may impose on the design and operation of the facility. This around the sites and
construction of the rehabilitation works. includes third party interference, easements.
relation to obtaining access to the pipe the pipe network.
network, including temporary occupation The Contracting Authority should
of sites for maintenance and laydown also manage any indigenous
areas. land rights issues that may
The Contracting Authority would generally impact on the use of the site.
impacts on the project.
Government Support
Market Comparison
term.
surveys performed by the Contracting
Party.
Where it is not possible to fully survey
prior to award (eg. Identification of
underground existing assets) risk will be
allocated to the Contracting Authority or
shared.
Land purchase The risk of acquiring Emerging X The Contracting Authority bears the The Contracting Authority should The Contracting Authority Land and access rights and
and site risk title to the land to be principal risk for ensuring that the required undertake detailed ground, may need to use its ground conditions (in
used for a project, the land interests in the sites designated for environmental and social legislative powers to particular reliable utilities
selection of that site the project are within its ownership or assessments and should obtain and then secure records, and land charges) in
and the geophysical control, or that it has sufficient legal rights disclose such information to the the sites and easements emerging markets may be
conditions of that site. (contractual or statutory) over them to Private Partner as part of the (e.g. through less certain than in developed
Planning permission. enable this to occur. bidding process. expropriation / markets where established
The land interests may be provided by the The Contracting Authority should compulsory acquisition). land registries and utility
Access rights. records exist. Lenders and
Contracting Authority to the Private also undertake detailed site Even where there is a
Security. Partner, if it has or has acquired the surveys to identify the location of legally clear site, sponsors often have to
relevant land rights (through contract or the existing assets and to Government enforcement become comfortable with
Heritage.
statute), or a third party landowner who confirm, or otherwise, that the powers may be needed to wholly contractual land rights
Archaeological. (registered only through the
has agreed to grant the relevant land existing assets are located on properly secure the site
Pollution. rights. As the project will be transferred to the sites and within the for the project. There may notarisation process).
Latent defects. the Contracting Authority at the end of the easements that it owns or be historic encroachment In the absence of legislation in
agreed term, the land rights are usually controls. issues that the Private emerging markets, indigenous
granted to the project under lease or The Contracting Authority should Partner cannot be land rights issues and
similar arrangements. allow access to the Private expected to deal with. community engagement can
Additionally, the Contracting Party bears Partner during the bidding This may particularly be be managed by the
the principal risk of ensuring that the process to carry out its own the case in relation to the Contracting Authority through
existing assets are located on the sites surveys of the sites and the pipe network. the adoption of IFC
and within the easements that it owns or existing assets. Examples include the Safeguards for the project,
controls. need to manage the particularly in order to ensure
The Contracting Authority international financing options
Government Support
Market Comparison
The Private Partner will be responsible for should, to the greatest extent relocation of people, are available to the project.
assessing the adequacy of the sites possible, ensure that it has a either permanently or
designated by the Contracting Authority complete understanding of the temporarily and continued
and the land rights granted (including any risks involved in securing the site efforts to manage the
associated easements and access rights) and the site constraints that may social and political impact
and any restraints that the designated impact on the rehabilitation and of the project on and
sites may impose on the design and operation of the facility. This around the sites and
construction of the rehabilitation works. includes third party interference, easements.
relation to obtaining access to the pipe the pipe network.
network, including temporary occupation
of sites for maintenance and laydown
areas.
impacts on the project.
term.
surveys performed the Contracting Party..
and social risk latent environmental responsibility to accept the project site and conduct the necessary due will need to take increasing even in developed
conditions affecting the existing assets in an “as is” condition, diligence in order to ascertain meaningful steps both markets, as both Private
project and the subject to the Contracting Authority’s the environmental fitness of the before and during the Partners and Contracting
subsequent risk of disclosure of relevant matters, and site and existing assets and project to manage social Authorities have come under
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Market Comparison
damage to the manage the environmental, public health disclose all known environmental impacts of construction increasing burdens to develop
environment or local and social strategy across the project, as issues to the Private Partner. and operation. sound environmental, public
communities well as obtaining and maintaining all The Contracting Authority will be Investors and lenders health and social risk
required licenses, permits and required to review all may expect to see a plan management plans before
authorisations as necessary. environmental plans put forward to see how these aspects construction begins. For
Existing environmental risks of the site by the Private Partner, to ensure are dealt with. example, in Australia the
prior to the Private Partner’s acceptance that such plans will be adequate requirement for such plans is
of the site that have not been disclosed or to appropriately manage the required by legislation.
within the knowledge of the Private risks of the project. International lenders and
Partner prior to commercial close will be development finance
deemed to be the responsibility of the institutions are particularly
Contracting Authority. See comments on sensitive about environmental
“Land purchase and site risk” for a water and social risks, as a result of
distribution project in developed markets. their commitment to the
Social risks, insofar as they may involve Equator Principles. They will
indigenous groups, will be the look very closely at how these
responsibility of the Contracting Authority. risks are managed at both
private and public sector level
and this scrutiny is helpful to
these issues.
conditions affecting the environmental, public health and social diligence in order to ascertain meaningful steps both institutions are particularly
project and the strategy across the project, however the environmental fitness of the before and during the sensitive about environmental
subsequent risk of existing environmental conditions which site and disclose all known project to manage social and social risks, as a result of
damage to the cannot be adequately catered for or priced environmental issues to the impacts of construction their commitment to the
environment or local (such as intake water contamination) may Private Partner. and operation. Equator Principles. They will
communities usually to be retained by the Contracting The Private Partner would also Investors and lenders look very closely at how these
Authority. be required to carry out a full site may expect to see a plan risks are managed at both
investigation and the Contracting to see how these aspects private and public sector level
Authority will be required to are dealt with. and this scrutiny is helpful to
review all environmental plans mitigate the risks posed by
prepared by the Private Partner, these issues.
Design risk The risk that the project Developed X The Private Partner will have principal The Contracting Authority will The Contracting Developed market water
has not been designed responsibility for the adequacy of the generally provide minimum Authority’s role will be distribution projects benefit
adequately for the design of the rehabilitation works and its functional / performance limited to review of the from stable resource
purpose required. compliance with the functional / specifications and require design to ensure that the availability, robust regulatory
Feasibility study. performance specification provided by the compliance with applicable legal minimum functional / regimes and defined design
Contracting Authority. requirements and good industry performance standards which allow for
Approval of designs. practice standards. This allows specifications will be able increased innovation and
Changes to design. design risk to the extent that the design is for private sector innovation and to be met. This review will efficiency gains.
dependent on interconnections for which efficiency gains in the detailed not be an approval,
the Contracting Authority retains design. however, and will not limit
responsibility, such as the raw water The Contracting Authority should the liability of the Private
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Market Comparison
supply connection points and raw water take time to ensure that the Partner.
quantity and quality, and for the condition minimum functional /
of the existing assets as at the performance specifications will
commencement of the term. provide a facility that will meet
met.
Design risk The risk that the project Emerging X The Private Partner will have principal The Contracting Authority will The Contracting Developed market distribution
has not been designed responsibility for the adequacy of the generally provide minimum Authority’s role will be projects will generally have
adequately for the design of the rehabilitation works and its functional / performance limited to review of the well defined design standards.
purpose required. compliance with the functional / specifications and require design to ensure that the However, particularly on a
Feasibility study. performance specification provided by the compliance with applicable legal minimum functional / rehabilitation project, the
Contracting Authority. requirements and good industry performance quality of information provided
Approval of designs. practice standards. This allows specifications will be able by the Contracting Authority
Changes to design. design risk to the extent that the design is for private sector innovation and to be met. This review will and limited ability to verify that
dependent on interconnections for which efficiency gains in the detailed not be an approval, data may hinder the Private
the Contracting Authority retains design. however, and will not limit Partner’s ability to assume this
responsibility, such as the raw water The Contracting Authority should the liability of the Private risk unconditionally.
supply connection points and raw water take time to ensure that the Partner.
quantity and quality, and for the condition minimum functional /
of the existing assets as at the performance specifications will
commencement of the term. provide a facility that will meet
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Market Comparison
met.
Construction Labour dispute. Developed X The Private Partner assumes all These risks can be mitigated The Contracting Authority In developing markets, the
damage. termination regime. experience in the sector relation to the design and emergency situations,
(demonstrated over a lengthy construction of the works including water quality and
IP right period) and obtaining to the facility and the public health issues, and also
breach/infringement. appropriate security to the risk of network. to engage a replacement
Quality assurance non-performance (for example, contractor to rectify, remedy or
standards. parent company guarantees, address any issues, during the
performance bonds and letters construction and operation
Defective material.
of credit). phase.
Latent defects.
These mitigants can be In developed markets risk is
Subcontractor implemented through the considered manageable
disputes/insolvency. tendering, tender evaluation and through robust pass through
Cost overruns where no due diligence process and by of obligations to credible and
compensation /relief way of the security provisions in experienced subcontractors
event applies. the relevant documentation. and by appropriate timetable
The concession agreement will and budget contingency.
Authority.
damage. termination regime. experience in the sector relation to the design and emergency situations,
(demonstrated over a lengthy construction of the works including water quality and
IP right period) and obtaining to the facility and the public health issues, and also
breach/infringement. appropriate security to the risk of network. to engage a replacement
Quality assurance non-performance (for example, contractor to rectify, remedy or
standards. parent company guarantees, address any issues, during the
performance bonds and letters construction (and operation)
Defective material.
of credit). phase.
Latent defects.
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Market Comparison
Cost overruns where no due diligence process and by
Authority.
Completion The risk of Developed X The Private Partner will bear principal The Contracting Authority will The Contracting Authority In developed markets,
(including delay commissioning the responsibility for delay and cost overrun usually wish to implement a may have a critical role to enforcement of construction
and cost asset on time and on risk. single stage completion process play at stages of the deadlines and budgets may
overrun) risk budget and the The principal risk arising out of delay will for commissioning the construction, testing and be easier than in emerging
consequences of be the loss of expected revenue, the rehabilitated facilities. Financial commissioning process in markets as the Private Partner
missing either of those ongoing costs of financing construction penalties and liquidated terms of ensuring that any will typically have more
two criteria. and extended site costs. damages can help enforce rights that it has to experience of the market and
construction deadlines. comment on design reliable resources, and be
Given the integrated nature of the water development and testing more confident in its ability
distribution system, the Private Partner is The combination of (i) incentives
or penalties for timely completion results do not adversely and focus for enforcing its
best placed to provide all procurement, delay the project. rights.
construction and commissioning of the and (ii) the implementation of a
rehabilitation works across the entire “longstop date” (a date which is The Contracting Authority
facility. This is generally managed through pegged to a prescribed time will generally allow for
the engagement of a single EPC period after the scheduled certain relief events, delay
contractor or EPC consortium. completion date) will create the events or force majeure
necessary tension to incentivise events where delays or
The Private Partner will be expected to timely completion while allowing cost overruns have arisen
demonstrate that the facility is the Private Partner a reasonable from either the fault of the
substantially complete and meets the amount of time to meet its Contracting Authority, or
minimum performance levels before it is contractual responsibilities in no-fault events.
given permission to enter into commercial spite of delays before the
operation. Water distribution projects Similarly the Contracting
Contracting Authority can Authority may need to
require detailed commissioning and terminate the project.
testing regimes to ensure that the facility take responsibility for
meets the output, water quality, efficiency If the Contracting Authority is delays caused by the
and environmental requirements set by responsible for providing or failure of public bodies to
the minimum functional / performance procuring any new or upgraded issue necessary consents
specifications under contract and interconnection facilities, the in good time (depending
legislation. Contracting Authority should on whether such risk has
ensure that those facilities are been assumed by the
If additional interconnection facilities are procured or upgraded in Contracting Authority or
required for the project (such as new or sufficient time to enable the the Private Partner).
upgraded connections to the raw water performance by the Private
supply network), construction of these Partner of its obligations.
additional facilities may also be included
within the Private Partner’s scope of
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Market Comparison
responsibility, transferring the risk of
delays and cost overruns in the
construction to the Private Partner.
Ownership and responsibility for operation
and maintenance of these additional
facilities will be transferred to the
Contracting Authority on completion of
construction and commissioning, subject
to the Private Partner’s defect rectification
period.
Separate testing and taking over
requirements are generally set out for
additional interconnection facilities
transferred to the Contracting Authority on
completion.
Completion The risk of Emerging X The Private Partner will bear principal The Contracting Authority will The Contracting Authority In emerging market water
(including delay commissioning the responsibility for delay and cost overrun usually wish to implement a may have a critical role to distribution projects there is
and cost asset on time and on risk. single stage completion process play at stages of the increased risk of delays
overrun) risk budget and the The principal risk arising out of delay will for commissioning the construction, testing and arising from unanticipated
consequences of be the loss of expected revenue, the rehabilitated facilities. Financial commissioning process in challenges in construction and
missing either of those ongoing costs of financing construction penalties and liquidated terms of ensuring that any unreliable resources.
two criteria. and extended site costs. damages can help enforce rights that it has to Ensuring a realistic time frame
construction deadlines. comment on design at project out set rather than
Given the integrated nature of the water development and testing an ambitious or desired time
distribution system, the Private Partner is The combination of (i) incentives
or penalties for timely completion results do not adversely frame may save time and
best placed to provide all procurement, delay the project. money for all parties in the
construction and commissioning of the and (ii) the implementation of a
“longstop date” (a date which is The Contracting Authority long run.
rehabilitation works across the entire
facility. This is generally managed through pegged to a prescribed time will generally allow for The Contracting Authority will
the engagement of a single EPC period after the scheduled certain relief events, delay need to be prepared to
contractor or EPC consortium. completion date) will create the events or force majeure enforce its rights to manage
necessary tension to incentivise events where delays or the consequences of a failure
The Private Partner will be expected to timely completion while allowing cost overruns have arisen by the Private Partner to meet
demonstrate that the facility is the Private Partner a reasonable from either the fault of the the construction milestones. In
substantially complete and meets the amount of time to meet its Contracting Authority, or an emerging market context,
minimum performance levels before it is contractual responsibilities in no-fault events. the dynamics may be different
given permission to enter into commercial spite of delays before the if the lenders have a
operation. Water distribution projects Similarly the Contracting
Contracting Authority can Authority may need to significant underwrite of their
require detailed commissioning and terminate the project. senior debt.
testing regimes to ensure that the facility take responsibility for
meets the output, water quality, efficiency If the Contracting Authority is delays caused by the The management of
and environmental requirements set by responsible for providing or failure of public bodies to completion risk is typically
the minimum functional / performance procuring any new or upgraded issue necessary consents addressed by having either: (i)
specifications under contract and interconnection facilities, the in good time. a scheduled completion date
legislation. Contracting Authority should (with attached liquidated
ensure that those facilities are damages for delay) followed
If additional interconnection facilities are procured or upgraded in by a fixed period for operation
required for the project (such as a new sufficient time to enable the commencing on the actual
substation to supply electricity or new or performance by the Private completion date, or (ii) the
upgraded connections to the raw water scheduled construction period
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Market Comparison
supply network), construction of these Partner of its obligations. forming part of the fixed
additional facilities may also be included operation period (with
within the Private Partner’s scope of extensions for certain events
responsibility, transferring the risk of such as force majeure).
delays and cost overruns in the With the latter scenario, in
construction to the Private Partner. emerging markets, the
Ownership and responsibility for operation Contracting Authority may
and maintenance of these additional attempt to additionally impose
facilities will be transferred to the delay liquidated damages on
Contracting Authority on completion of the Private Partner. However
construction and commissioning, subject this decision should always be
to the Private Partner’s defect rectification assessed against the
obligations during the prescribed warranty likelihood that genuine out-of
period. pocket costs will actually be
Separate testing and taking over incurred for such delay, so as
requirements are generally set out for to avoid unnecessary
additional interconnection facilities contingency being built into
transferred to the Contracting Authority on the project (which then
completion. increases ‘price’).
Performance/ The risk that the asset Developed X The Private Partner bears the risk of The onus is on the Contracting Where certain For developed markets, there
price risk is unable to achieve the achieving the performance specification Authority to draft attainable performance indicators will be well developed
output specification such as water quality specifications, water standards based on domestic cannot be met due to domestic and international
metrics and the price or flow and volumes. and international water actions by the Contracting minimum standards for the
cost of doing so. The Contracting Authority bears the risk of standards, relevant market data Authority or unforeseen quality and flow of water that
enforcing the regime and for ensuring that and requirements and policy circumstances, the will generally be uncontested
the output specification is properly tailored objectives. Performance based Private Partner may be during the bid phase.
to what the Private Partner can deliver. on water quality, flow and eligible to seek relief
volumes can be measured and/or compensation.
In an availability based payment structure against pre-determined
the Private Partner may be subject to schedules or standards.
abatement if performance based
standards are not met. The relevant project documents
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Market Comparison
mechanism.
Performance/ The risk that the asset Emerging X The Private Partner bears the risk of The onus is on the Contracting Where certain For emerging markets,
price risk is unable to achieve the achieving the performance specification Authority to draft attainable performance indicators particularly in the case of
output specification such as water quality specifications and standards based on domestic cannot be met due to market first projects, the
metrics and the price or guaranteed water capacity. and international water actions by the Contracting preparation of attainable
cost of doing so. The Contracting Authority bears the risk of standards, relevant market data Authority or unforeseen standards by the Contracting
enforcing the regime and for ensuring that and requirements and policy circumstances, the Authority is complicated by the
the output specification is properly tailored objectives. Performance based Private Partner may be lack of relevant and/or
to what the Private Partner can deliver. on water quality, flow and eligible to seek relief historical market data.
volumes can be measured and/or compensation.
Consideration needs to be given to the against pre-determined
ability of the Private Partner to achieve the schedules or standards.
necessary performance levels given the
nature of the project and the emerging The relevant project documents
market in which it will be based. will contain clear key
mechanism.
Resource or The risk that the supply Developed X The main input or resource required for a The Private Partner may be Where the Contracting Developed markets generally
input risk of inputs or resources water distribution project is water. This is incentivised to increase Authority is unable to do not experience market
required for the usually within the ownership or control of efficiencies in energy meet its contracted volatility to the extent of
operation of the project the Contracting Authority and, accordingly, consumption throughout the thresholds for the quantity emerging markets, and
is interrupted or the it generally bears principle responsibility term by a mechanism to share and/or quality of water, or resource availability is less of
cost increases. for the quantity and quality of the water the savings. is unable to secure the a concern. Energy costs may
supplied at the delivery point. The Private Partner will be supply of the resources it still vary significantly over the
The other main input or resource required limited, however, in its ability to is responsible for (such as course of project that must be
for a water distribution network is power pass through any costs to the a continuous energy accounted for and may not be
for pumping. The Contracting Authority end consumer due to the fixing supply) the Private able to be passed through to
typically bears the principle responsibility of water tariffs in the concession. Partner may be eligible to consumers.
to ensure an uninterrupted supply of seek relief and/or
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Market Comparison
power to the facility. The price of the compensation.
power is often a pass-through cost. The
Private Partner will generally bear the risk
of all other resources to operate the
Resource or The risk that the supply Emerging X The main input or resource required for a The Private Partner may be Where the Contracting Emerging markets are
input risk of inputs or resources water distribution project is water. This is incentivised to increase Authority is unable to generally more susceptible
required for the usually within the ownership or control of efficiencies in energy meet its contracted than developed markets to
operation of the project the Contracting Authority and, accordingly, consumption throughout the thresholds for the quantity contamination events and
is interrupted or the it generally bears principle responsibility term by a mechanism to share and/or quality of water, or market volatility/major cost
cost increases. for the quantity and quality of the water the savings. is unable to secure the variations, including labour
supplied at the delivery point. The Private Partner will be supply of the resources it security and costs.
The other main input or resource required limited, however, in its ability to is responsible for (such as
for a water distribution network is power pass through any costs to the a continuous energy
for pumping. The Contracting Authority end consumer due to the fixing supply) the Private
typically bears the principle responsibility of water tariffs in the concession. Partner may be eligible to
to ensure an uninterrupted supply of seek relief and/or
power to the facility. The price of the compensation.
power is often a pass-through cost.
The Private Partner will generally bear the
risk of all other resources to operate the
Time and cost risks associated with water
and power supply are typically retained by
the Contracting Authority. All other time
and cost risks would be borne by the
Private Partner and typically passed on to
contractors.
Demand risk The availability by both Developed X The default position for water distribution As it will be absorbing a As the Contracting In developing markets, the
volume and quality projects in developed markets is that the minimum level of resource Authority will be retaining Contracting Authority should
along with Contracting Authority is a monopoly raw (supply) and demand risk, the raw water supply and have access to various data
transportation of water supplier, and has been the Contracting Authority should do consumer demand risk, it sources to develop accurate
resource or inputs to a monopoly distributor through the assets a full assessment of raw water will need to ensure that it consumption forecasts, such
project or the demand the subject of the project, and will supply and consumer demand is comfortable (both that the Contracting Authority
for the product of guarantee minimum quality, volumes and as part of the project feasibility politically and is well placed to manage
service of a project by availability for supplied raw water and study to ensure that the economically) with water potable water demand.
consumers/users retain a minimum level of demand risk. concession agreement supply and consumer
appropriately addresses and demand forecasts.
allocates risk for everything that
will impact on raw water supply
and consumer demand.
Demand risk The availability by both Emerging X The default position for water distribution The Contracting Authority should As the Contracting For emerging markets,
volume and quality projects in emerging markets is that the do a full assessment of raw Authority will be retaining particularly in the case of
along with Contracting Authority is a monopoly raw water supply and consumer raw water supply and market first projects, the
transportation of water supplier, and has been the demand as part of the project consumer demand risk, it preparation of demand profiles
resource or inputs to a monopoly distributor through the assets feasibility study to ensure that will need to ensure that it by the Contracting Authority is
project or the demand the subject of the project, and will the concession agreement is comfortable (both complicated by the lack of
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Market Comparison
for the product of guarantee minimum quality, volumes and appropriately addresses and politically and relevant and/or historical
service of a project by availability for supplied raw water and allocates risk for everything that economically) with water market data.
consumers/users retain a minimum level of demand risk. will impact on raw water supply supply and consumer The high incidence of delayed
and consumer demand. demand forecasts. project execution in emerging
Regimes for network
expansion are often drafted
into the concession
agreement in order to facilitate
quick and efficient project
expansion.
Maintenance The risk of maintaining Developed X As occupier and operator of the facility The Contracting Authority should Generally, the Contracting In developed markets, the
appropriate standards Authority at the end of the term, the water supply agreement properly limited to defining Partner in the operation and
and specifications for Private Partner will have responsibility for defines the thresholds for the minimum maintenance maintenance of the project
the life of the project. meeting the maintenance requirements supply of water into the facility requirements, ensuring provides several benefits by
raw water supply agreement. Additionally, the arrangements if they are not. Partner in the rehabilitation
In addition to specific maintenance should properly define the The Contracting Authority works (construction) phase to
requirements imposed by the Contracting maintenance obligations on the may be required to ensure the operational life of
Authority, the Private Partner will be Private Partner to ensure that maintain interconnections the facility and that operation
responsible for maintaining the facility so the facility is properly maintained with the facility, such as and maintenance
as to meet the contractual levels of throughout the life of the project, the water supply system considerations are
quality, availability and volume of output to ensure that the facility is in a appropriately considered in
required to secure its revenue stream. satisfactory condition in the the design of the rehabilitation
event of early termination or on works.
The Private Partner generally assumes
the risk of all maintenance, including expiry of the agreement, at
periodic and preventative maintenance, which point the facility will be
emergency maintenance work, work transferred to the Contracting
stemming from design or construction Authority. The Contracting
errors and all rehabilitation work. Authority should also consider
whether any long term services
Maintenance events affecting the or supplies should be secured
availability of the facility and impacting on for the facility.
supply are generally scheduled by
agreement with the Contracting Authority Subject to the requirements of
and scheduled maintenance may be the Private Partner’s financing
prohibited during times of peak demand. parties, the Contracting Authority
should consider specific
The Contracting Authority generally requirements in relation to the
retains the risk of certain events impacting use of property damage
the project (such as political risk and insurance to reinstate the facility.
regulatory / change in law risk). In this
case, the Contracting Authority may be Adequate performance by the
required to provide relief to the Private Private Partner will be further
Partner for the impacts on the project of enforced by ensuring that the
additional maintenance required by those payment mechanism reflects the
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Market Comparison
events (including the additional costs of Private Partner’s ability to meet
maintenance), but responsibility for the contractual levels of volume,
performance of the maintenance remains availability and quality and by
with the Private Partner. including termination triggers for
The Contracting Authority may retain the material performance shortfalls.
maintenance risk associated with the There may also be specific
infrastructure connecting with the facility, transfer provisions providing for
such as the water supply pipe delivering the condition of the facility to be
the water to the facility’s delivery point. It assessed during the last few
is usual for the Contracting Authority to years of the project. The Private
also assume responsibility for all Partner will then be required to
maintenance of the facility on its transfer carry out any remedial work
to the Contracting Authority at the end of necessary to ensure that the
the term. facility meets the required
Maintenance The risk of maintaining Emerging X As occupier and operator of the facility The Contracting Authority should Generally, the Contracting In developed markets, the
appropriate standards Authority at the end of the term, the water supply agreement properly limited to defining Partner in the operation and
and specifications for Private Partner will have responsibility for defines the thresholds for the minimum maintenance maintenance of the project
the life of the project. meeting the maintenance requirements supply of water into the facility requirements, ensuring provides several benefits by
raw water supply agreement. Failure to get the thresholds right if they are not. Partner in the rehabilitation
In addition to specific maintenance for the project effectively transfer The Contracting Authority works (construction) phase to
requirements imposed by the Contracting risk back to the Contracting may be required to ensure the operational life of
Authority, the Private Partner will be Authority. maintain interconnections the facility and that operation
responsible for maintaining the facility so with the facility, such as and maintenance
Additionally, the arrangements considerations are
as to meet the contractual levels of should properly define the the water supply system.
quality, availability and volume of output appropriately considered in
maintenance obligations on the the design of the rehabilitation
required to secure its revenue stream. Private Partner to ensure that works.
The Private Partner generally assumes the facility is properly maintained
the risk of all maintenance, including throughout the life of the project, Additionally, in emerging
periodic and preventative maintenance, to ensure that the facility is in a markets, the Contracting
emergency maintenance work, work satisfactory condition in the Authority should consider its
stemming from design or construction event of early termination or on ability to take on responsibility
errors and all rehabilitation work (including expiry of the agreement, at for maintenance following the
latent defects). which point the facility will be transfer of the facility on early
transferred to the Contracting termination or expiry and
Maintenance events affecting the whether provisions should be
availability of the facility and impacting on Authority. The Contracting
Authority should also consider put in place to support the
supply are generally scheduled by necessary transfer of
agreement with the Contracting Authority whether any long term services
or supplies should be secured expertise and/or personnel in
and scheduled maintenance may be the short term.
prohibited during times of peak demand. for the facility.
The Contracting Authority generally Subject to the requirements of

the Private Partner’s financing
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Market Comparison
retains the risk of certain events impacting parties, the Contracting Authority
the project (such as political risk and should consider specific
regulatory / change in law risk). In this requirements in relation to the
case, the Contracting Authority may be use of property damage
required to provide relief to the Private insurance to reinstate the facility.
Partner for the impacts on the project of Adequate performance by the
additional maintenance required by those Private Partner will be further
events (including the additional costs of enforced by ensuring that the
maintenance), but responsibility for payment mechanism reflects the
performance of the maintenance remains Private Partner’s ability to meet
with the Private Partner. the contractual levels of volume,
The Contracting Authority may retain the availability and quality and by
maintenance risk associated with the including termination triggers for
infrastructure connecting with the facility, material performance shortfalls.
such as the water supply pipe delivering There may also be specific
the water to the facility’s delivery point. It transfer provisions providing for
is usual for the Contracting Authority to the condition of the facility to be
also assume responsibility for all assessed during the last few
maintenance of the facility on its transfer years of the project. The Private
to the Contracting Authority at the end of Partner will then be required to
the term. carry out any remedial work
necessary to ensure that the
occur that are beyond that entitle 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 could include: force majeure risks that cause following a force majeure compensates the Private
parties and delay or physical damage. event, an amount of Partner, only for its
prohibit performance. - natural force majeure events, which compensation should outstanding debt (but not for
the risk of disruption as a result continue to be payable by its expected rate of return) for
fire, earthquake, tsunami, flood, cyclone, the Contracting Authority termination arising from a
mitigated by relaxing the to the Private Partner in “natural” force majeure.
epidemic or plague, accidents or order to service the
paying the Private Partner for Private Partner’s debt
- other force majeure events which actual water availability during obligations during the
typically cannot be insured (often the force majeure event and course of the event.
described as ‘political force majeure’ relieving it from any penalties for Where the project is
events) (e.g. war within the jurisdiction, consequent inability to perform). terminated, in some
strikes / protest, terrorism, riots etc). jurisdictions the
Alternatively the project may be Contracting Authority may
The Private Partner will generally be subject to abatement but be required to fully
entitled to an extension of time (but excused from non- compensate the Private
sometimes only over an agreed threshold) performance/breach. Partner for debt owed to
the lenders. Whether the
debt will be kept whole in
such a scenario, will be a
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Market Comparison
majeure. key area of focus for
revenue commencement. The ability of assessments.
been exceeded.
tariff to the extent of its availability. If it is a
political force majeure event, the Private
event.
Force majeure The risk that Emerging X Force majeure is a shared risk and there Project insurance (physical See comments on the risk On emerging market
risk unexpected events will be a fairly well developed list of events damage and loss of revenue of uninsurability for a transactions, the Contracting
occur that are beyond that entitle the Private Partner to relief. coverage) is the key mitigant for water distribution project Authority often does not
the control of the Typical events could include: force majeure risks that cause in emerging markets. provide any compensation for
parties and delay or physical damage. termination arising from a
prohibit performance. - natural force majeure events, which “natural” force majeure, on the
the risk of disruption as a result grounds that this should be
fire, earthquake, tsunami, flood, cyclone, insured. In the event of
mitigated by relaxing the prolonged force majeure, the
epidemic or plague, accidents or Contracting Authority will be
requiring a lower level of entitled to terminate.
- other force majeure events which availability without incurring
typically cannot be insured (often performance penalties).
described as ‘political force majeure’
events) (e.g. war within the jurisdiction,
strikes / protest, terrorism, riots etc).
The Private Partner will generally be
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Market Comparison
majeure.
been exceeded.
tariff to the extent of its availability. If it is
a political force majeure event, the Private
event.
Exchange and The risk of currency Developed X The Contracting Authority would The Private Partner would look The Contracting Authority In developed markets, the risk
interest rate risk fluctuations and or the specifically prohibit the Private Partner to mitigate this risk through is not expected to assist of currency fluctuations and
interest rate over the from claiming additional costs for general hedging arrangements under the the Private Partner in interest rates is generally not
life of a project currency and interest rate fluctuations. Finance Documents, to the mitigating such risks. substantial enough to require
The Private Partner would look to mitigate extent possible in that market. the Contracting Authority to
this risk through hedging arrangements provide support.
under the Finance Documents, to the
extent possible in that market.
Exchange and The risk of currency Emerging X The Contracting Authority would The Private Partner would look As the water tariffs will be In emerging markets, the risk
interest rate risk fluctuations and or the specifically prohibit the Private Partner to mitigate this risk through paid in local currency, the of currency fluctuations is
interest rate over the from claiming additional costs for general hedging arrangements under the Contracting Authority may often a key bankability issue.
life of a project currency and interest rate fluctuations, Finance Documents, to the retain the risk of Issues of convertibility of
although certain elements of the tariff may extent possible in that market. devaluation of the local currency and restrictions on
be adjusted for fluctuations between the currency to the extent that the repatriation of funds are
local currency and USD. such devaluation impacts also bankability issues upon
The Private Partner would look to mitigate on the economic viability termination in emerging
this risk through hedging arrangements of the project (due to the markets.
under the Finance Documents, to the need to pay for foreign
extent possible in that market. currency imports and
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service foreign currency
debt).
Insurance risk The risk that insurance Developed X Where risks become uninsurable (ie not As part of the feasibility study The Contracting Authority In developed market
for particular risks is or available on commercially reasonable the Contracting Authority and may need to consider transactions, as neither party
becomes unavailable. terms in the international insurance Private Partner should consider whether it stands behind can better control the risk of
market) there is typically no obligation to whether insurance might unavailability of insurance coverage becoming
maintain insurance for such risks. become unavailable for the insurance, in particular unattainable and insurance
If an uninsured risk event occurs, the project given the location and where this has been coverage should be less
parties may agree to negotiate in good other relevant factors. caused by in-country or volatile than for emerging
faith risk allocation going forward, while regional events or markets, this is typically a
allowing for the termination of the project if circumstances. shared risk. However, in
an agreement cannot be reached. The some developed jurisdictions
Contracting Authority may choose to uninsurable risk may remain
assume responsibility for the uninsurable with the private sector.
risk, while requiring the Private Partner to Where the cost of the required
regularly approach the insurance market insurance increases
to obtain any relevant insurance. significantly, the risk is
If the uninsured risk is fundamental to the typically shared by either
project (e.g. physical damage cover for having an agreed cost
major project components) and the parties escalation mechanism up to
are unable to agree on suitable ceiling or a percentage
arrangements then the Private Partner sharing arrangement - this
may need an exit route (e.g. termination of allows the Contracting
the project on the same terms as if it were Authority to quantify the
an event of force majeure) if it cannot contingency that has been
reinstate the project on an economic priced for this risk.
basis. In circumstances where the
Insurance risk The risk that insurance Emerging X Where risks become uninsurable (ie not As part of the feasibility study, The Contracting Authority On emerging market
becomes unavailable. terms in the international insurance Private Partner should consider whether it stands behind Authority typically does not
market) there is typically no obligation to whether insurance might unavailability of take the risk of uninsurability
maintain insurance for such risks. become unavailable for it given insurance, in particular arising on the project,
If an uninsured risk event occurs, the the location and other factors where this has been although there are good
Private Partner will typically have to bear relevant to the project. caused by in-country or grounds to say that it should
this risk. regional events or do so if the Private Partner
circumstances. has no protection for the
If the uninsured risk is fundamental to the consequences of a natural
project (e.g. physical damage cover for force majeure that becomes
major project components) then the uninsurable.
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Market Comparison
basis.
Private Partner with the lease or licence involve a breach of obligations or debt and equity. political risk insurance is not
and access to necessary sites and the interference by the Contracting typically obtained.
network necessary to allow the Private Authority with the project.
discrimination, seizure the Private Partner’s control. Government departments keep termination right for the cover themselves by use of
or expropriation of the This concept may include any act or in line with the project objectives Private Partner and the political risk insurance, leaving
project. omission of any Government entity which and will need to actively manage Contracting Authority will this risk to be managed by the
may have a material adverse impact on the various stakeholders in the need to stand behind debt insurer against the
the Private Partner’s ability to perform its project to achieve this. and equity, potentially Contracting Authority.
obligations and/or exercise its rights under with a Government
the concession. guarantee.

Regulatory/chan The risk of law Developed X The risk of change in law sits mostly with Change in law risk that is The Contracting Authority Projects in the water sector
ge in law risk changing and affecting the Contracting Authority but there will be retained by the Private Partner should be mindful of how involve a close interaction with
the ability of the project a degree of risk sharing in the following may be mitigated by indexation it will fund these consumers and public health
to perform and the price manner: provisions (on the basis that specific/discriminatory regulation plays a paramount
at which compliance The Private Partner will be kept whole in general changes in law will affect changes should they role. A change in the public
with law can be respect of changes in law which are: (i) the market equally and should arise. health and water quality
maintained. Discriminatory (to the project or the be reflected in general inflation). legislation may well be of
Change in taxation. Private Partner) (ii) Specific (to the water Some projects only permit the general effect but may have a
sector, for example a change in Private Partner to claim relief for disproportionate effect on the
mandatory standards for water quality, or general changes in law occurring water sector, and in particular,
to PPP projects in the jurisdiction) or (iii) after completion of construction. on distribution network to
general change in law affecting capital This approach may be justified if consumers. For this reason,
expenditures. the country's legal regime the parties may seek to adopt
ensures that the prevailing legal definitions of
A change in law is often subject to a de discriminatory/specific change
minimis threshold before the Private regime at the start of
construction is fixed until the in law to include any general
Partner is entitled to compensation changes in law that have this
works are complete (i.e. does
The Private Partner will not be not operate retrospectively to disproportionate effect.
compensated for general changes in law projects in progress).
that only affect operational expenditure or
taxation (i.e. affect the market equally).
Changes in law will always entitle the
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Private Partner to a Variation where this is
obligation. If this cannot be achieved the
Private Partner will typically be entitled to
terminate as if a Contracting Authority
and (iv) a change in water quality the concept of Private not generally have to prove
standards. Partner immunity from that it could have anticipated
(c) changes in the
internationally and changes in
the exchange rate between
local currency and USD are
often specifically excluded as
changes in law. This reflects
both the Contracting
Authority’s expectations about
the Private Partners (ie as
international developers,
contractors and operators)
and the developing nature of
legislative reform in these
areas.
more than expected. while inflation risks during the concession kept neural in respect of both costs by incorporating the not experience fluctuations to
term will typically be borne by the international and local consumer price index into the extent of emerging
inflationary costs through an
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Contracting Party. appropriate inflation uplift or tariff the monthly payments. markets.
On availability-based projects, the adjustment regime.
availability payment will typically include
(to reflect variable financing costs and
variable inputs such as labour and
chemicals).
Inflation risk The risk that the costs Emerging X Inflation risk is typically borne by the The Private Partner will look to The payment mechanism The fluctuation of inflationary
of the project increase Contracting Authority. be kept neutral in respect of both incorporates indexation costs is a greater risk in
more than expected. On availability-based projects, the international and local for inflation costs by emerging markets than it is in
availability payment will typically include inflationary costs through an incorporating the developed markets and the
both a fixed component (where debt has appropriate inflation uplift or tariff consumer price index into Private Partner’s expectation
been hedged) and a variable component adjustment regime. the monthly payments. will be that this risk is borne
(to reflect variable financing costs and and managed by the
variable inputs such as labour and Contracting Authority during
chemicals). the concession term.
Indexation for inflation is
typically linked to local
consumer index. In emerging
markets, local consumer index
lack independence and are
sometimes manipulated by the
Government for fiscal and
social reasons.
Strategic risk Change in shareholding Developed X Bids are awarded on the basis of the Contracting Authority will limit In developed markets, the lock
of Private Partner. Private Partner’s technical expertise and Private Partner’s ability to in periods and conditions are
Conflicts of interest financial resources. The Contracting change shareholding for a typically less restrictive than in
between shareholders Authority will want to ensure that the specified minimum period (i.e. developed markets with
of Private Partner. sponsors, particularly founding sponsors, lock-in for construction period) Contracting Authorities’ being
to whom the project is awarded remain and thereafter may impose a more comfortable with
involved for a minimum period of time. regime restricting change in changes in shareholding to
control without consent or where equivalent owners.
met.
Private Partner.
Where Private Partner proposes
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resources.
Conflicts of interest resources. The Contracting Authority change shareholding for a typically more restrictive and
between shareholders wants to ensure that the sponsors, specified minimum period (i.e. longer than in developed
of Private Partner. particularly founding sponsors, to whom lock-in for construction period). markets.
the project is awarded remain involved for Pre-tender proposal should set
a minimum period of time. out proposals for governance of
Private Partner.
Disruptive The risk that a new Developed X The technology requirements will usually The Contracting Authority should The concession In developed markets, this has
technology risk emerging technology be specified by the Contracting Authority do a full assessment of relevant agreement may contain a not been typically addressed
unexpectedly displaces in the bid phase and agreed with Private technologies as part of the variation clause to provide but is expected to increase
an established Partner in the agreements. project feasibility study to ensure for both parties to with technological advances,
technology. that the selected technologies propose variations to the for example smart metering.
are appropriate to the conditions minimum functional
of the project and market tested. specification, in particular
The Contracting Authority may where this may deliver
impose an obligation on Private public health and water
Partner to seek continuous efficiency benefits.
improvement in specified areas,
for example in monitoring and
metering.
The Private Partner may be
obliged to operate in accordance
with best industry practice which
may also impose some
obligation on the Private partner
to take on improvements in
technology.
Disruptive The risk that a new Emerging X The technology requirements will usually The Contracting Authority should The concession In emerging markets, this risk
technology risk emerging technology be specified by the Contracting Authority do a full assessment of relevant agreement may contain a is not typically addressed in
unexpectedly displaces in the bid phase and agreed with Private technologies as part of the variation clause to provide the project documents. As
an established Partner in the agreements. project feasibility study to ensure for both parties to project implementation and
technology. that the selected technologies propose variations to the execution are often delayed in
are appropriate to the conditions minimum functional emerging markets, the risk of
of the project and market tested. specification, in particular technology change could be
The Private Partner may be where this may deliver considered higher than in
obliged to operate in accordance public health and water developed markets.
with best industry practice which efficiency benefits.
may also impose some
obligation on the Private partner
to take on improvements in
technology.
Early The risk of a project Developed X The Contracting Authority can face the The Contracting Authority should The lenders will require In developed markets, early
termination being terminated before following risks on expiry or termination of ensure that there is no direct agreements with termination compensation is
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(including any the expiry of time and the concession period: uncertainty about the Private the Contracting Authority well defined and political risk
compensation) the monetary (a) uncertainty about the type and Partner’s obligations at the end giving the lenders step-in insurance is not typically
risk consequences of such timing of transfer of the assets of the concession period (due to rights in the case of the obtained due to a lesser risk
termination (either back to the Contracting expiry or termination). Contracting Authority of the Contracting Authority
Authority or to a replacement These matters can be addressed calling a default defaulting on its payment
Private Partner); in the concession agreement termination or in the event obligations.
and should deal with redelivery of the Private Partner
(b) re-delivery of poor condition or being in default under the
out-of-specification assets; obligations, compensation
(either on a net book value or loan documentation. The
(c) receiving inadequate present market value basis), lenders would typically be
compensation for non- access to warranties and given a grace period to
performance and early termination guarantees and transfer of gather information,
(if applicable); operation and maintenance manage the project
know-how. company and seek a
(d) inability to obtain the benefit of
resolution or ultimately
supply/manufacturer warranties; A further key mitigant is to make novate the project
and sure the termination triggers are documents to a suitable
(e) other related political and public not hair triggers and that there substitute concessionaire.
relations issues. are adequate well-defined routes
for each party to remedy any
The level of compensation payable on
alleged default.
early termination will depend on the
reasons for termination and typically for:
Private Partner would get senior debt,
junior debt, equity and a level of equity
return;
Partner would get senior debt and equity
return; and
(3) Private Partner default – (a) Where the
project cannot be retendered (due to
political sensitivity or a lack of interested
parties) the Private Partner would typically
be entitled to an amount equal to the
adjusted estimated fair value of future
payments, less the costs of providing the
services under the project/concession
agreement. (b) Where the project can be
termination scenario (in some
jurisdictions, with the exception of
termination for Private Partner default),
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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
termination rights.
compensation) the monetary (a) uncertainty about the type and Partner’s obligations at the end a higher level of Contracting Authority’s
risk consequences of such timing of transfer of the assets of the concession period (due to Government to guarantee payment obligations.
termination (either back to the Contracting expiry or termination). the level of compensation Political risk insurance may be
Authority or to a replacement These matters can be addressed payable on termination. available and is likely to be
Private Partner); in the concession agreement The lenders will require sought to cover the risk of the
(b) re-delivery of poor condition or and should deal with redelivery direct agreements with Contracting Authority or
out-of-specification assets; obligations, compensation the Contracting Authority Government guarantor
(either on a net book value or giving the lenders step-in defaulting on its payment
(c) receiving inadequate present market value basis), rights in the case of the obligation.
compensation for non- access to warranties and Contracting Authority
performance and early termination guarantees and transfer of calling a default
(if applicable); operation and maintenance termination or in the event
(d) inability to obtain the benefit of know-how. of the Private Partner
supply/manufacturer warranties; A further key mitigant is to make being in default under the
and sure the termination triggers are loan documentation. The
not hair triggers and that there lenders would typically be
(e) other related political and public
are adequate well-defined routes given a grace period to
relations issues.
for each party to remedy any gather information,
The level of compensation payable on manage the project
alleged default.
early termination will depend on the company and seek a
reasons for termination and typically for: resolution or ultimately
1) Contracting Authority default – the novate the project
Private Partner would get senior debt, documents to a suitable
junior debt, equity and a level of equity substitute concessionaire.
return;
Partner would get senior debt and equity
return; and
(3) Private Partner default – (a) Where the
project cannot be retendered (due to
political sensitivity or a lack of interested
parties) the Private Partner would typically
be entitled to an amount equal to the
adjusted estimated fair value of future
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Market Comparison
payments, less the costs of providing the
services under the project/concession
agreement. (b) Where the project can be
termination rights.
Risk Matrix 12: Solid waste collection, disposal, landfill and recycling project (DBFO) 254
Risk Matrix 12: Solid waste collection, disposal, landfill and recycling (DBFO)
 New waste to energy plant as a DBFO project where the waste disposal capacity is sold to a state owned single buyer but with the ability to sell capacity to third
parties wishing to dispose of commercial and industrial waste
 Project scope does not include associated infrastructure, such as water pipelines and electricity transmission which will be provided by the state owned buyer (and
specifically ensures that the state ensures an appropriate site. Grid connection works may form part of the infrastructure work however
 Technology is neutral in this matrix as there is such a variety of waste to energy solutions from incineration to fuel production/gasification and generating electricity
from biogas from waste. Technologies are usually (but international practice varies) not specified by the procuring entity but do result in different technological risks
for the project
 There are markets where waste to energy is emerging not only as a means to handling and disposal of solid waste but as a sustainable energy source. Projects in
these markets are not being structured as per developed markets based on “gate fee” disposal cost models but more on an “availability” basis for the conversion of
fixed specification solid waste into guaranteed energy level outputs. Essentially, a power project
 Key risks
 Design risk
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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. Even where you have a registries and utility records.
Access rights. existing utilities and contamination either The Contracting Authority legally clear site, The Private Partner’s
dealt with or fully surveyed and warranted. should, to the greatest extent Government enforcement obligations with regards to
Security. Existing assets proposed to be used in the possible, ensure that it has a powers may be needed to indigenous rights are
Heritage. project should also be fully surveyed and complete understanding of the properly secure the site generally well legislated in
warranted. The Private Partner may take risks involved in securing the site for the private sector. developed markets, for
Archaeological.
some risk for dealing with adverse and the site constraints that will There may be historic example requirement to enter
Pollution. conditions revealed by surveys but other impact on the construction and encroachment issues that into indigenous land use
Latent defects. unforeseeable ground risks (e.g. operation of the facility. the Private Partner cannot agreements under native title
archaeological risks) are likely to be held The Contracting Authority should be expected to deal with. legislation in Australia and the
by the Contracting Authority. also manage any indigenous equivalent under first nations
The Contracting Authority should also land rights issues that may law in Canada.
consider the impact that the project will impact on the use of the site.
have on neighbouring properties and Prior to awarding the concession
trades and may need to retain this risk of the Contracting Authority could
unavoidable interference. (through legislation and a proper
That said, there may be some areas consultation process) limit the
where risk will be shared with the Private ability for potential land right
Partner. Whilst the Contracting Authority owners or neighbouring
may be able to secure the project site, the properties and trades to raise
location suitability may be dependent on claims on the land and/or for
the Private Partner’s design solution (such injurious affection.
as availability of water and power required
for the proposed waste treatment
process).
Environmental The risk of 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 emerging
communities. and authorizations as necessary. The Contracting Authority will be Investors and lenders social risk management plans
The risk that all Existing environmental risks of the site required to review all may expect to see a plan before construction begins.
necessary statutory and prior to the Private Partner’s acceptance environmental plans put forth by to see how these aspects
environmental permits of the site that have not been disclosed or the Private Partner, to ensure are dealt with and this
and consents for the within the knowledge of the Private that such plans will be adequate may need to be
processing and Partner prior to commercial close will be to appropriately manage the contractualised.
treatment of relevant deemed to be the responsibility of the risks of the project.
waste sources have Contracting Authority. See comments on
been obtained. “Land purchase and site risk” for a waste
management BOT project in developed
markets.
Social risks, insofar as they may involve
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Market Comparison
indigenous groups, will be the
The Private Partner will procure the
necessary consents, including
environmental permits, at its own
expense.
The Private Partner will be required to
comply with the terms of and observe all
conditions attaching to any and all
necessary consents and any planning
agreements insofar as they may apply to
the site from time to time. This includes a
requirement to obtain, implement and
maintain and renew as necessary all
necessary consents.
Design risk The risk that the project Developed X The Private Partner will have principal The Contracting Authority will Developed market projects
has not been designed responsibility for adequacy of the design often broadly draft the Private benefit from stable precedent
adequately for the of the facility and its compliance with the Partner’s design and or comparator projects which
purpose required. output / performance specification. construction obligations to allow the Private Partner to
Feasibility study. satisfy the output specifications demonstrate technology to the
and ensure compliance with Contracting Authority.
Approval of designs. applicable legal requirements However the use of
Changes to design. and good industry practice comparator projects as ‘most
standards. This allows for bankable’ can stifle new
private sector innovation and innovation.
efficiency gains in the design
and choice of appropriate waste
treatment technology.
allow for increased dialogue and
cooperation between the
Contracting Authority and the
Private Partner; however the
mutual review process should
not be construed as a reduction
Partner’s overall liability.
Construction Quality assurance Developed X Private Partner assumes turnkey Private Partner will attempt to
risk standards. construction and project management risk. address by passing through
Defective material. Private Partner is responsible for obligations to the construction
integrating various aspects of construction contractor.
Latent defects. such as engineering, civil construction The construction contractor will
Interface/project works and technology integration in the be liable for performance
management. waste treatment facility. damages in relation to
Cost overruns where no Private Partner required to construct to underperformance of the
compensation /relief specific industry standards to ensure completed facility and the facility
event applies. fitness for purpose of the waste treatment may be rejected if performance
facility and to meet certain defined levels are significantly below the
Commissioning
performance guarantees. The facility contractual requirement.
damage.
may be rejected if performance levels are Construction contractor will pay
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IP right significantly below the contractual delay damages for programme
breach/infringement. requirement and termination payments will overruns.
Labour disputes. become due from the Private Partner.
Subcontractor Private Partner takes risk of cost overrun

disputes/insolvency. where no compensation/relief event
applies. Private Partner will takes the risk
on delay damages for programme
overruns.
Private Partner takes labour dispute risk
unless political.
Private Partner takes risk of IP right
infringement.
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 gatefee revenue, completion date) will create the rights that it has to resources, but Contracting
Testing. the ongoing costs of financing necessary tension to incentivise comment on design Authority will need to be wary
construction, extended site costs and timely completion while allowing development and testing of technology risk if they are
Performance. the Private Partner a reasonable results do not adversely being offered processes that
continuing landfill costs for waste not
treated at the facility during the delay amount of time to meet its delay the project. are new or innovative and not
period. contractual responsibilities in The Contracting Authority yet fully deployed for a
spite of delays before the may allow for certain relief meaningful test period on a
The Private Partner is best placed to Contracting Authority can commercial scale.
integrate complex civil works, the delivery events, delay events or
terminate the project. force majeure events
and commissioning the facility, operations,
and preventative and lifecycle where delays or cost
maintenance to ensure a reliable service overruns have arisen from
for an efficient price. This may be either the fault of the
managed through a single EPC joint Contracting Authority, or
venture or by the Private Partner no-fault events.
managing a series of works, supply and Similarly the Contracting
operation/commissioning contracts. Authority may need to
The Private Partner will be expected to take responsibility for
demonstrate adequate system delays caused by the
performance before it is given permission failure of public bodies to
to operate the system. Waste issue necessary consents
management BOT projects require in good time.
complex commissioning and testing
regimes given the intricacies involved in
ensuring that the process plant will meet
the necessary reliability and performance
requirements of the output specifications.
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
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Damage Pollution are properly tailored to what the Private on increased recycling, landfill circumstances, the specifications and models.
Accidents. Partner can deliver. Consideration needs reduction, availability, and Private Partner may be
Meeting handback to be given to the ability of the Private quality of service can be eligible to seek relief or
requirements Partner to achieve the necessary measured against pre- compensation.
performance levels, and the determined schedules or
Health and Safety appropriateness of metrics given the standards.
Equipment becoming nature of the project.
Expansion.
Resource or The risk that the supply Developed X The Private Partner bears the principal The Contracting Authority will be Monthly payments to the If Contracting Authority takes
input risk of sufficient quantities responsibility to ensure an uninterrupted allowed to monitor the supply of Private Partner may risk on delivery of waste then
of waste required for supply of inputs/resources for the project required resources, and may include certain it will also take risk on the
the expected output of and to manage the costs of those inputs. allow for the Private Partner to calculations that could characteristics of the waste
the facility is interrupted If the Contracting Authority cannot supply substitute resources if alleviate uncontrollable too. It needs to be confident
or the cost increases. contracted tonnages of waste the Private necessary. cost increases due to that it can manage this risk, or
Partner may be required to procure Where the contractor secures increases in waste pass it to third party supplier.
substitute waste. substitute waste then the costs/reduced gatefee
Contracting Authority shall pay that would otherwise be
The Private Partner must use reasonable borne by the Private
endeavours to secure substitute waste at the difference or losses incurred
by the Private Partner. Partner.
a price which is demonstrated to the
Contracting Authority's satisfaction as
being reasonably obtainable on market
and arm’s length terms for contracts of the
nature and tenor proposed.
Demand risk The availability by both Developed X The default position for waste The Contracting Authority should As the Contracting In developed markets, the
volume and quality of management BOT projects in developed do a full assessment of demand Authority will be retaining Contracting Authority should
waste or refused markets is for the Contracting Authority to risk and should ensure that the demand risk, it will need have access to various data
derived fuel to a project retain some risk on waste availability by concession agreement to ensure that it is sources to develop realistic
or the demand for the providing either exclusivity of all waste appropriately addresses and comfortable (both and attainable waste arisings
product of service of a arising in a local area or by guaranteeing allocates the risk for everything politically and and revenue forecasts, such
project by waste tonnages to be delivered at the that will impact on demand. economically) with that the Contracting Authority
consumers/users facility. The parties should also develop demand forecasts. is well placed to manage
The Private Partner takes the risk of a comprehensive market demand and gatefee risk.
securing sufficient third party waste to fill strategy for procurement of
additional capacity to make up its revenue substitute waste.
base case.
appropriate standards standards regarding maintenance as set output specification properly undue interference with Partner in the operation,
Increased maintenance The Private Partner generally assumes Partner to ensure that the facility and rehabilitation services provides several benefits by
costs due to increased the overall risk of periodic and remains robust in the event of (with the exception of incentivising greater care and
waste volumes preventative maintenance, emergency early termination or expiry of the minor management diligence by the Private
including third party maintenance work, work stemming from agreement. services) reduces the Partner in the construction
waste. design or construction errors, rehabilitation The primary role of the benefits of the BOT phase, and increasing the
work, and in certain project model Contracting Authority is to project model. useful life of the infrastructure.
Incorrect estimates and
cost overruns. instances, work stemming from properly define the output
implementing technological or structural specifications and level of
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changes. services required of the Private
Partner.
Further, the Contracting
Authority may establish a
facilities management committee
to oversee the Private Partner’s
performance of the maintenance
and rehabilitation services, along
with a formal mechanism to
discuss and resolve
performance related issues.
quality and availability failures.
The Contracting Authority will be
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
suspended for a period of time. allows the Private Partner to course of the event.
take the risk of a certain number Where the project is
Force majeure events occurring during terminated, the
construction will also cause a delay in of day-to-day adverse events
typical to a project of this nature Contracting Authority may
revenue commencement. The ability of the be required to fully
Private Partner to bear this for uninsured but without incurring
performance penalties). compensate the Private
risks will be limited, and the Contracting Partner for debt owed to
Authority will typically have to bear the risk The risk of missing recycling or senior lenders. Whether
after a certain period of time or level of landfill reduction targets would the debt will be kept
cost has been exceeded. shift back to the Contracting whole in such a scenario,
During operations, the impact of the force Authority. will be a key area of focus
majeure event will depend on whether the for prospective lenders as
project is availability based (where relief part of their initial credit
from KPI penalties may be required) or is assessments.
demand-based (where an element of
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gatefee subsidy may be required).
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
market. Contracting Authority to
provide support.
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
are unable to agree on suitable contingency that has been
arrangements then the Private Partner priced for this risk.
may need an exit route (e.g. termination of In circumstances where the
the project on the same terms as if it were required insurance becomes
an event of force majeure) if it cannot unavailable, the Contracting
reinstate the project on an economic Authority is typically given the
basis. option to either terminate the
Public sector Private Partner with the license and involve a breach of obligations or debt and equity. political risk insurance is not
budgeting. access to the system and surrounding interference by the Contracting typically obtained.
lands necessary to allow the Private Authority with the project.
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 Projects in the waste
ge in law risk changing and affecting the Contracting Authority but there will be retained by the Private Partner (including that developed management sector involve a
the ability of the project a degree of risk sharing in the following may be mitigated by indexation in the UK) used to require close interaction with
to perform and the price manner: provisions (on the basis that the Private Partner to environmental regulation. A
at which compliance The Private Partner will be kept whole in general changes in law will affect assume, and price for, a change in environmental
with law can be respect of changes in law which are: (i) the market equally and should specified level of general legislation may have general
Government Support
Market Comparison
maintained. Discriminatory (to the project or the be reflected in general inflation). change in law capex risk application but may have a
Change in taxation. Private Partner) (ii) specific (to the waste Change in law risk may also be during the operational disproportionate effect on the
sector) or (iii) general change in law mitigated where there is an period, before waste sector. For this reason
affecting capital expenditures. A change ability to pass back changes in compensation would be some waste management
in law is often subject to a de minimis the tariff charged on the project. paid. The UK Government BOT projects have adapted
threshold before the Private Partner is This is less commonly available ultimately decided that the standard definitions of
entitled to compensation on waste management BOT this allocation did not discriminatory/specific change
The Private Partner will not be projects which tend to be represent value for money in law to include any changes
compensated for general changes in law structured on an availability- and reversed this in law having such an effect.
that only affect operational expenditure or payment basis rather than a position. Some countries
taxation (i.e. affect the market equally). demand basis. which adopted the
Changes in law will always entitle the SOPC/WIDP model had
Some projects only permit the already taken this
Private Partner to a Variation where this is Private Partner to claim relief for
necessary to avoid an impossible approach. Accordingly the
general changes in law occurring Contracting Authority
obligation. If this cannot be achieved the after completion of construction.
Private Partner will typically be entitled to should be mindful of how
This approach may be justified if it will fund these changes
terminate as if a Contracting Authority the country's legal regime
breach had occurred. should they arise -
ensures that the prevailing legal changes in gatefee may
In recognition that the environmental regime at the start of be possible but this may
legislative landscape has shifted quickly in construction is fixed until the have a detrimental effect
recent years practice has developed in the works are complete (i.e. does on achieving
UK for identifying a list of ‘foreseeable’ but not operate retrospectively to recycling/landfill diversion
unquantifiable laws which parties agree projects in progress). targets.
are likely to come into effect during the
construction phase but which are
sufficiently underdeveloped that it would
not represent best value for the Private
Partner or its EPC contractor to price it.
Changes relating to these items will be the
more than expected. while inflation risks during the concession kept neutral in respect of both costs by incorporating the not experience fluctuations to
term will typically be primarily borne by the international and local consumer price index into the extent of emerging
Contracting Authority. inflationary costs through an the monthly payments. markets.
On availability-based projects, during the appropriate inflation uplift or tariff
concession term, the availability payment adjustment regime.
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.
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
Government Support
Market Comparison
consent or where pre-agreed plans, particularly in the equity
criteria cannot be met. investor markets.
Private Partner.
Disruptive The risk that a new Developed X Where the waste treatment facility has The Private Partner can mitigate Established technologies are
technology risk emerging technology been constructed and is operating there is the impact of disruptive most likely to attract
unexpectedly displaces less risk of disruptive technology affecting technology by ensuring that it, commercial lending terms as
the established the project. and the EPC contractor, are banks are keen to see tested
technology used in a Where the waste treatment facility has not aware of and have access to up operational projects as a
particular waste yet been completed and commissioned, to date and efficient technology. benchmark. New technologies
treatment process. disruptive technology becomes more of an in emerging markets will
issue if the procuring Authority is aware of potentially be attractive to
new and more competitive technology Contracting Authorities but it
which they can use to drive the cost down. will be difficult to attract
This requirement places additional commercial lenders.
constraints on the Private Partner and the
possible profits of the project.
There may be a wider risk if disruptive
technology (or change in law) leads to a
substantial reduction in the volume of
waste available to the facility.
calling a default
Government Support
Market Comparison
termination rights.

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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.

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

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

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Scope and Terminology

Common and civil law distinctions

individual country’s background and political objectives are probably more

calibrate the deductions.

and a certain degree of political risk.

Risk Matrix 1: Toll road (DBFO)

 Land purchase and site risk

Risk Matrix 2: Airport (DBFO)

There may be specific instances where Lenders may look to sponsors

In Colombian PPP projects the risk requiring a lower level of

Risk Matrix 3: Light rail (DBFOM)

If the output specification is too of an appropriate risk allocation

The Private Partner will generally have an

Risk Matrix 4: Heavy rail (ROT)

 Land purchase and site risk

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

Latent defects. MSAs contain detailed IP right provisions.

Health and safety

Risk Matrix 5: Port (DBFO)

Certain investors, such as DFIs,

Demand risk The availability by both Developed X

Risk Matrix 6: Solar PV (BOO)

Risk Matrix 7: Hydro power (BOOT)

Risk Matrix 8: Power transmission (BOOT)

In circumstances where the required

Risk Matrix 9: Natural gas distribution (ROT)

 Land purchase and site risk

Water and Sanitation Sector

Risk Matrix 11: Water distribution (ROT)

 Land purchase and site risk

The Contracting Authority generally Subject to the requirements of

The Private Partner would expect not only

Subcontractor Private Partner takes risk of cost overrun

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