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...
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...
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...
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...
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...
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...
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-...
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...
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.
This risk refers to the risk (especially from the public perspective) of the infrastructure not being available to use and/or not meeting the quality or expected performance levels. This risk is borne by the private partner as it is the essence of the PPP objectives. The mechanism to transfer the...
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...
General project company costs
General company costs include the permanent staff of the company, which is usually more of an administrative centre with limited personnel. For instance, it could include staff to manage the finance of the project and interact with the procuring authority and the...
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 (...
The risk of the taxation framework changing during the course of a contract is generally borne by the private partner when referring to taxes that are part of the common business environment, with exceptions.
In some contexts, a value-added tax (VAT) may be an exception to the general rule, and...
When, as is commonly the case in most PPPs, the asset will be "handed back" to the authority at the end of the contract, this should be done in an appropriate physical state. The authority should not be exposed to the risk of the asset having a short remaining life, a low residual value, or being...
Financing the asset is an essential obligation in a PPP, and the risks of availability and cost of the financing should generally be borne by the private partner (with the exception and to the limit established in the contract in those projects under a co-financing scheme – see chapter 5.4)....
There is a risk of funding not being available at financial close or only being available at a significantly worse price (margin and fees) and conditions (including debt service cover ratio [DSCR] or maximum term) than anticipated. This risk is generally to be assumed by the private partner....
Generally speaking, the project company has to adequately plan its financial needs, building up in the financial plan the necessary contingent funds. Reserves for renewals and major maintenance have already been mentioned. Another common reserve, as requested by the lenders, is the debt service...
