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1.2.10 Technological Obsolescence and Technical Enhancements

Technological obsolescence risk refers to the risk of certain equipment becoming inadequate for the purpose of the service — or the service becoming poorer in comparison with more recent services being provided in the course of the project. When the private partner is exposed to market risk (competition for the service), this risk shall be generally borne by the private partner who will have a natural incentive to implement changes in technology.

An example of this may be found in a HSR system where the government remains as the administrator of the traffic system and/or the trains are operated by a SOE. It would have the obligation to implement new technologies even when the enhancement is not prescribed by law or sectorial regulation. This should be subject to those new technologies being common practice and tested in other projects. It should not change the nature of the service being provided, but effectively be a new and better option to provide the same service with more reliable results or higher effectiveness and service quality.

This general statement of transferring this risk to the private partner should be subject to cautious judgment when structuring and designing the contract. This allows for the consideration of exceptions or caps in the risk exposure when the financial impact is material, especially if the contract term is advanced and close to the expiration of the term.

When it is unclear how to define whether the technological advancement is or is not a common practice or new "de facto" standard, and when there are doubts about the value added by the enhancement as well as the perception that costs will be considerably higher, the most appropriate approach will be to treat these situations as a general change in service requirements or change in works. It is common practice to request the enhancement only when the respective asset or component of the asset is to be replaced or renewed as scheduled in the life-cycle plan.

When a replacement/substitution of equipment is a legal obligation that was not possible to anticipate at the time of the contract execution, and this adversely impacts in a material form the financial equation of the project, it is good practice to establish a financial relief mechanism in the contract so as to share and limit the cost impact (see “changes in law” below). Regulatory standards may vary over time and the risk as perceived by the private investor of such changes should not prevent a government changing and improving regulatory requirements in its search for higher efficiency and/or safety and public interest in general, and applying these to existing projects.

However, it may be appropriate to limit or share the risk of the replacement, renovation, or substitution of equipment and any other cost due to a regulatory technical enhancement requirement — unless the enhancement is a wider matter affecting the general economy and any type of business.

A last consideration is that the service requirements (including potential requirements to change equipment so as to adapt new technologies) should not be changed capriciously during the course of the contract. When not specifically regulated in the contract, any change in the requirements requested by the public partner should generally be deemed as a change in service or change in scope of works (see below).

 

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