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).
However, there are projects where the geo-technical risks are very significant. This can occur when a change in the anticipated geo-technical conditions, or the inability to anticipate those conditions, produces a serious cost increase. A not uncommon, though rather extreme, example is when a tunnelling machine has to be replaced because it cannot bore the tunnel as it was not designed for use in conditions that were unanticipated.
The most common case of projects with substantial geo-technical risk profiles are linear infrastructure projects with significant numbers or sizes of tunnels, or bridges.
In such projects, the authority must conduct a meaningful assessment and produce detailed surveys to investigate and collect information on the likely geo-technical conditions (in the process of project preparation). It is also good practice to share the risk and/or limit the risk exposure to the private partner. Provided the information on geo-technical conditions allows the authority to create a reasonably sound estimate of the conditions, this is the kind of event where the likelihood of the unexpected might be low but the potential impact may be extraordinary. Therefore, the private party will either not bid or build in extraordinary contingencies regarding price, which will not represent Value for Money. Best practice includes the definition of a baseline of geo-technical conditions which will be used to assess the materiality of adverse conditions that entitle the private party to financial relief or compensation.
Another risk that may be included in this category is the removal of contamination and/or hazardous materials. In some projects, the site may be affected by contamination and/or hazardous materials that lie on or under the project site as a result of previous use. Contamination or hazardous material risk (or risk of decontamination of land) is usually treated in the same way as similar risks (for example, archaeological, environmental) by being subject to previous assessments and tests. The risk of having to decontaminate the ground or the site and handle hazardous material disposals is usually borne by the private partner, but it may be a sensible exception in projects where this risk may be significant.
There are projects where the site is already available for constructing the asset. In other cases, the asset may be already built and the object of the PPP is to expand or upgrade it (for example, the extension of an existing road, the upgrading of a road to have more lanes, refurbishment of an existing hospital, and so on).
The risk of latent defects (that is, defects in the site or in the very infrastructure as previously built and maintained) should be assumed by the private partner only when meaningful information is available to enable prospective bidders to investigate and assess the asset condition before submitting the bid.
It should be noted that in some sectors/types of projects where this risk may be highly significant for its environmental implications (for example, for power plant rehabilitation or expansion of hazardous waste treatment), the government will commonly decide to retain the existing environmental risks.
The rationale of this risk allocation is that life-cycle risks are an essential element of the overall risk transfer and general scope of a PPP.
However, when there is inadequate or insufficient information, it is good practice to share this risk to some extent by limiting or capping the exposure of the private partner. This is based on the principle of unforeseen events and materiality or significance. If a defect arises and was not reasonably foreseeable according to good professional practice, and as long as it has an adverse significant impact, this will be shared or partially compensated by the authority. It will be treat the event as a compensation event in the contract.
When this risk is entirely allocated to the private party, the authority should transfer the rights for claiming against previous contractors (when available), or it should otherwise commit to take the necessary actions to claim against previous contractors and grant the potential compensation received to the private partner.
Archaeological findings may cause significant impacts in terms of project cost and time.
- They may severely affect the project if, for example, a change in the route is necessary.
- They may require works to preserve, protect, or relocate the findings.
- The works will be paralyzed until a detailed assessment is done, which may cause great delays (as long as the finding impacts the critical path of construction).
When archaeological findings are a significant risk at the particular project site, it is essential that the authority develops archaeological site studies (archaeological maps), including digging tests, in the course of its preparatory activities (see chapter 4) so as to anticipate as far as possible the occurrence of construction-adverse findings.
The allocation of the actual risk of the such an occurrence that is, findings that were not anticipated or unanticipated impacts of such findings (for example, it being necessary to deviate the route of a road), varies significantly depending on the country practice and legal framework.
- It is common and good practice that the private partner is exposed to some extent, even if it is limited, to those risks. The risk is, above all, a time related risk (that is, potential delays in construction), and may be significantly mitigated by means of proper management of the construction schedule.
- It is also good practice that risks with severe impacts on the project — as long as they were not anticipated in surveys or other information available — are taken back by the public party, at least under a shared risk mechanism. For example, granting relief with respect to time delays beyond a certain delay period. This should be done on the basis of a baseline of conditions or linked, to some extent, with objective information so as to assess whether a risk was, or was not, a foreseeable event under good diligence and good practice.
This may also apply to findings related to some environmental concerns ( for example, endangered species).
This risk is usually passed through the contractor, but it is not infrequent that the contractor does not accept back-to-back transfer of the risk for unforeseeable findings.
This refers to the risk of utilities being in a different place or requiring more work than anticipated.
This risk is generally borne by the private partner. However, as in the case of environmental and archaeological risks, it is essential that the public partner mitigate the risks by investigating and assessing utility locations in advance of the contract tender.
In some contexts, especially for transportation projects in urban areas, this risk may be significant if the information on utility locations and physical state is not obtained and accessible. In these cases, it is not uncommon to share or limit the risk exposure of the private partner.
There are also other potential risks that may emerge during the Construction Phase: force majeure, changes in law, changes in services, and termination are explained in a specific heading below, as they may affect or emerge in both phases of the contract.