1.2.6 Third Party Revenues and Ancillary Revenues
When the mix of future revenues includes revenues coming from third parties or produced by ancillary businesses, the risk of those revenues being lower than anticipated is generally allocated to the private partner.
1.2.5 Revenue Risk - Inflation and Indexation
Inflation, when considering not only revenues but also costs, is a two-sided risk: higher inflation affecting costs will result in lower operational margins. However, provided that it is neutralized by a revenue indexation mechanism, it may result in higher nominal cash flows to debt service and to shareholders, increasing the equity internal rate of return (IRR) in nominal terms.
1.2.4 Private Perspective Only – Revenue Risk – Government-Pays Counterparty Risk
In government-pays PPPs, the risk of default by the authority is obviously a private side risk inherent in the strategic decision of investing in a particular country market or in the projects promoted by a particular authority. We basically refer here to credit risk.
This is more an issue in sub-sovereign PPPs.
1.2.3 Revenue Risks – Fraud and Collection Risks (only in user-pays)
Fraud may be considered a subset of volume risk in user-pays PPPs when considering volume as the level of demand that effectively pays for the service. Fraud is commonly used to refer to willingly avoiding payment, whereas collection risks include non-payment when the payment may be or become unaffordable for the user.
1.2.2 Revenue Risk – Tariff Levels (only in user-pays PPPs)
In the context of user-pays projects (for example, a toll road, a rail project including service operations, or a water PPP including water supply to the public), revenue risk includes the risk of the charges to users not being at the anticipated level in each particular year. This may cause either a lower or higher than expected income.
When assessing the risk, it should be noted that price volatility will also affect volume risk, so lower levels of tariff may not necessarily result in lower revenues or vice versa.
1.2.1 Revenue Risk – Demand or Volume Risk [3]
Demand risk transfer should be always be considered with caution. Significant transfer of the risk, with no mitigation or sharing mechanisms, should only be considered when boosting demand is essential to the success of the project from the government’s perspective (see section 4.9). Another general rule for deciding the allocation of use/demand is the scope of the project. If the essence of the PPP is to operate institute tariffs or collect tolls, some exposure to risk should naturally be included in the contract.
1.2 Describing Main Risks during the Operations Phase and Potential Allocation
1.1.7 Other Potential Interruptive Events during Construction
Site and ground conditions/geo-technical risks
The risk of unexpected geological or geo-technical conditions in the ground will also be commonly allocated to the private partner in a conventional project, that is, in those projects where geo-technical conditions do not represent a significant challenge and/or information on ground conditions can be effectively tested (for example, for a building).
1.1.6 Completion and Commissioning
The completion risk or the commissioning risk refers to the risk of failure to meet the construction outcome as prescribed, and/or the project as constructed failing to meet the completion acceptance criteria, thereby causing a delay in earning revenue. It is, in essence, a construction or a design and construction risk that has to be borne by the private partner as a general rule — subject to the exceptions that the contract may provide, based on some specific risks events covered in this section materializing.
1.1.5 Construction Risk
Construction risk is the possibility that during the Construction Phase the actual project costs or construction time exceeds those projected.
The delay in the completion or commissioning will also represent a loss of income. This is assessed and categorized as a separate or ad hoc risk category in a number of manuals and guidelines, including this PPP Guide. (see below).