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1.2.8 Maintenance and Renewal Risks

Maintenance risk may refer to the risk of improper maintenance resulting in a lack of performance, which is implicit and covered in availability and performance risk analysis.

But maintenance risk also refers to the risk of higher costs for maintenance operations and plans (including current maintenance and life-cycle costs). This is the focus of the risk in this section.

This is also a general and natural risk to be allocated to the private party, as the maintenance obligation is a core element of any PPP contract scope.

The risk may correlate with the design risk, as improper design may lead to higher maintenance costs, especially major maintenance and renewals (life-cycle costs), which is a risk generally transferred by default to the private partner.

The risk also refers to the life-cycle management which is a specific feature of PPPs. In this sense, not only can design influence the life cycle of the infrastructure, but also renewals and major maintenance. These should be handled in advance through adequate planning (programming the cycle of renewals so as to avoid, as much as possible, interruption of the service or its availability), including the financial planning. Financial planning of major maintenance is a paramount factor of proper PPP management to avoid the unexpected unavailability of funds. For this purpose, it is good practice to incentivize in the contract the pre-funding of the maintenance works by creating specific reserves. This is also a concern for the lenders who will usually request a financial plan of maintenance works and the creation of contingency funds for unanticipated needs.

Lastly, the risk refers to ordinary maintenance costs (ad hoc small repairs, restoration of painting, recurrent cleaning, and so on). Some ordinary maintenance tasks are confused or overlap with certain services and other cost concepts that may not be considered as maintenance, but which may also be included in the maintenance concept.

Those works related to "soft services", especially in the context of social infrastructure, but also in some transportation projects (for example, catering), are explained below (see "other operating costs”), as well as some cost items that may require a specific risk allocation treatment, depending on the relevance and uncertainty surrounding the specific cost item. These are insurance costs and utilities costs.

Ordinary or current maintenance is handled by the private partner by passing through the risk of cost deviations to the maintenance contractor (which may be the same company or group of companies that handle the operations). Hard maintenance, in the sense of major maintenance and renewals, is a risk that may also be transferred to the maintenance contractor, or it may be retained or shared by/with the SPV, depending on the risk profile of the project.

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