This phase covers the period from the launching of the project to the point of financial close. This chapter assumes that the government has chosen to tender the project, rather than negotiating directly with a potential private sector contractor. The benefits of choosing a tender process are discussed in chapter 1.

During the Structuring Phase, explained in chapter 5, the tender process has been designed, including qualification criteria, evaluation criteria, and the requirements for submission of both qualifications and proposals.

From the perspective of the public partner, early termination risk is mainly a budgetary risk (in addition to the concern of how the service will be provided after the termination, at least until the private partner is replaced by a new contractor) which relates to the ability to meet the obligation to pay termination compensation when due. Proper risk management for the public sector is to assess this risk and include it in the affordability analysis, before approving the project tender.

A risk originally insurable (at the inception of the contract), and for which a requirement to be so insured has been included in the contract, may become uninsurable during the life of the contract. Unless specifically imputable to the private partner, this risk (of becoming uninsurable) should not be borne by the private partner. Instead, it is good practice that a contract provides for the ability to change the specific insurance requirement or for an automatic waiver of that specific obligation.

Vandalism is the risk of intentioned acts against the asset or parts of the asset. Generally, vandalism is a risk to be allocated to the private partner, as it is the economic owner of the asset and as such has the first responsibility to protect the asset’s physical and operational state.

Force majeure has been introduced in this chapter (see section 5.6).

As described in the referred section, force majeure may have different meanings (and therefore a different scope in terms of events included within the category or general term) in different jurisdictions, and it may even be a legally defined term of direct application to PPP contracts (especially in civil code countries where the administrative legal corpus regulates the procurement and public contracts).[14]

Setting aside the potential limits established by the procurement regulations in a number of countries, changes in scope of works (changing the design prescriptions) and changes in service requirements are always a risk event to be allocated clearly to the public partner.

The risk of changes in law refers to the risk of changes that may affect the project outcome, impacting on the costs (capital costs by means of new investments) or current operating costs (higher maintenance costs or higher operating costs).

Law is broadly defined for this purpose as laws, regulations, and government policies.

As long as the change in law affects any business, the risks should be generally assumed by the private partner[11].

This risk refers to the risk for the public partner of a worsening in the performance of the project if the new shareholder (when there is a change in control) is not as capable as, and does not have the capacity, of the original partner.

Generally, refinancing is not considered a downside risk but an upside benefit. When the project performs well, the private partner will have the ability to renegotiate the debt on better terms or refinance the debt, including an increase in the debt level so as to amortize share capital early (“recap”). Even if the project is performing simply as anticipated, there is likely to be an option to refinance since the risk profile will improve by entering into the Operations Phase.