Type of Project and Scope Considerations
This matrix addresses the common risks for the design, build, finance, (operation), maintenance and transfer to the Contracting Authority (at the end of the PPP contract) of a new PPP road.
Scope may include emergency accident and preventative responsibilities, roadside assistance (e.g. towing, fire extinction); traffic management obligations; obligations to interface with future changes in tolling technologies (such as real time tolling) and other future extensions or new interconnected roads; and obligations to adopt environmental measures.
Tolling, if applicable, may form part of the project scope or be separately tendered or be retained by the Contracting Authority.
Measures to address congestion may also be included – such as implementation of high occupancy lanes in peak periods with, where applicable, corresponding tolls.
Assumptions
The Private Partner finances the development of the new road and only starts to receive payment from the Contracting Authority (and/or where applicable, users) once the road is in operation.
The Contracting Authority identifies the right of way.
The road (and all related project assets) are handed back to the Contracting Authority on early termination or natural expiry of the contract, together with all consents and licences (including intellectual property licences) necessary to continue operating the road, in accordance with the contractual handback requirements.
Market Approaches
In addition to new build PPP projects, PPP projects involving rehabilitation and extension of existing roads are common and many projects involve a combination of all these elements.
As well as PPP approaches such as availability or demand risk-based projects/concessions, there are other contractual structures and procurement models that Contracting Authorities can use to deliver road infrastructure with private sector involvement. These include direct procurement of just the construction (or rehabilitation) of a road, or procurement of standalone maintenance contracts.
The risks and associated guidance included in this matrix will be relevant to different contractual structures, but will need to be adapted appropriately taking into account the scope and duration of the relevant contract and financing methods (such as whether there is a need for long term third party lending).
Project Revenues, Including Payment Mechanisms
Project revenues are generated either through availability payments by the Contracting Authority or user payments through tolls (i.e. in a demand/revenue risk-based project) or a combination of both. Deductions or penalties are typically applied to availability payments where the Private Partner has not met contractual availability and performance standard criteria. In a demand/revenue risk-based project, where user revenues are unlikely to be sufficient to cover the cost of the project, they may be supported by minimum traffic/revenue guarantees from the Contracting Authority in the operating period, or by an upfront subsidy towards capital expenditure (i.e. construction costs), typically payable on construction completion.
The availability payment structure is more common for a road PPP contract. Demand risk projects tend to typically involve government support with the result that any transfer of demand risk is in practice diluted.
See Performance/price risk under Operating risk and Demand risk.
Other Considerations
Staged operation commencement: Although a single operation commencement regime is more common, the Contracting Authority may wish to implement a multi-staged operation commencement process enabling the Private Partner to begin to receive payment once significant components of the project are substantially completed. This can help increase cash flow during the overall construction process, reduce the Private Partner’s financing costs and incentivize the phasing of construction works in order to ensure critical components are completed on time. On the other hand, staged completion dates may also increase the complexity of the construction programme, limit the Private Partner’s ability to mitigate construction delays and/or have agreed damages attached to them, which can increase the risk to the Private Partner. This is likely only to be suitable where distinct sections of the road can become operational in phases and where commencement of operation will not distract from ongoing construction requirements.
Private Sector Risk Mitigation
Allocation of risks to sub-contractors: See Risk Allocation in PPP contracts in the introduction and Cost increases and Works completion delays under Construction risk. As regards construction, the Private Partner will often enter into a lump sum construction contract with a construction sub-contractor to pass down its obligations under the PPP contract and to manage the risk of cost increases and delays (subject to certain relief to which the sub-contractor will be entitled under the sub-contract). The Private Partner will bear the risk of liability caps agreed under the sub-contract being reached or warranty periods under the sub-contract being shorter than the Private Partner’s defect rectification obligations towards the Contracting Authority. The Private Partner will similarly typically enter into an agreed price operating sub-contract with an operating sub-contractor to pass down its operating phase obligations to the extent practicable.
Insurance: See Risk Allocation in PPP contracts in the introduction.
Effective implementation of social and environmental management plan: See Environmental risk and Social risk.
Additional equity and other funding support: See Market Conditions in the introduction.
Public Sector Risk Mitigation
Carrying out detailed feasibility and ground surveys: See PPP Project Preparation and Delivery in the introduction. In addition, studies for roads project should include identification and suitability of corridor, additional land needs, interface with existing and future road and other transport networks (and corresponding impact on the project), traffic forecasts (especially in a toll road project) and social and environmental impact of both the construction and operation of the road. Detailed ground surveys should also be carried out where practicable. Where such information is provided to bidders to rely on in pricing their bids, Contracting Authorities may elect to guarantee accuracy but not necessarily completeness or interpretation - this will depend on project-specific factors including the experience of the bidders and the ability to obtain other relevant information.
Running an efficient and fair procurement process: See PPP Project Preparation and Delivery in the introduction. Enacting enabling legislation (if required) and complying with domestic procurement laws in relation to the project are primarily the Contracting Authority’s risk and responsibility. As the Private Partner will be affected by the consequences of breach of such legislation, it will carry out due diligence itself on these matters. Interference with the tender process and other issues attributable to the Private Partner will remain a Private Partner risk.
Timely consultation on social and environmental impact: It is key for the Contracting Authority to consider the effect of the project on people, wildlife and habitat and to implement effective management of stakeholder interests and public perception before and (in conjunction with the Private Partner) during the project. See Environmental risk and Social risk.
Having competent advisers: See Detailed Risk Identification and Analysis in the introduction.
Timely involvement of internal stakeholders and contract management team: See Detailed Risk Identification and Analysis in the introduction.
Careful assessment and quantification of risk: See Detailed Risk Identification and Analysis in the introduction.
Taking performance security: The Contracting Authority may seek certain security directly from the Private Partner and its sub-contractors, or their parent companies, in respect of certain contractual (or tender) obligations. This may be in the form of bid bonds during the tender stage and, following the tender stage, completion bonds, performance bonds and guarantees. As an alternative, cash reserving mechanisms could be used during the life of the contract. The Contracting Authority will be able to call on this security in certain circumstances (such as performance failures by the Private Partner). Security has a cost attached which will feed through to pricing. Disproportionate security requirements will negatively affect value for money.
Public Sector Support Measures
The Contracting Authority may provide certain financial support to the project, in terms of subsidies or guarantees, although the consequences of such commitments and the potential liabilities for the public sector should be carefully considered, including how such support may dilute the risk/reward distribution under the PPP contract (e.g. effectively take back much of any demand risk purportedly transferred) and affect value for money. Where the Contracting Authority’s own credit is weak or uncertain, additional credit support may be sought by the Private Partner and its lenders in respect of the Contracting Authority’s contractual financial obligations. This may be the case, for example, in projects where the Contracting Authority is not part of central government or it is a local authority. To mitigate this Contracting Authority counterparty risk, a sovereign or central government (e.g. finance ministry) guarantee (or equivalent support) may be needed, though the full implication for the public sector should be carefully assessed, including the potential impact on the government’s contingent liabilities and fiscal sustainability. See Demand risk, Project Revenues, Including Payment Mechanisms above and Strength of Contracting Authority payment covenant under Early termination risk.
Social Risk
Social Risk
The risk associated with the project impact on adjacent properties and affected people (including public protest and unrest); resettlement; indigenous land rights; and industrial action.
Risk Category and Description
Community and businesses
[Circumstance Dependent Risk]
Ultimately, the policy relating to the social impact of the provision of infrastructure is for the government. The Contracting Authority will bear this risk except to the extent the Private Partner is responsible for implementing any social management measures. The social impact of a road on communities and businesses may be a key issue and must be carefully assessed and managed by the parties.
During the feasibility stage, the Contracting Authority should have considered the impact on habitat, (social) infrastructure and communities generally, as well as on adjacent properties and industries – both in terms of the construction and operation of the road. It may need to carry out social impact studies and aim to minimise any negative impact of the project. Consultation may reduce the risk of opposition if outcomes are incorporated in the strategy and tender requirements. The approach, compensation schemes and what is acceptable should be addressed in the bid requirements and the contract. Investors and lenders may expect to see a plan addressing social impact, including the execution of any necessary contractual arrangements. The Contracting Authority may choose to adopt internationally recognised social and environmental standards and practices for the project to manage social risk, especially if international financing options are desirable.
All the way through construction and operations, active stakeholder engagement by the Contracting Authority will be critical to avoid litigation, achieve key milestones on time and ensure it is delivering infrastructure that serves its public purpose. Both the Private Partner and the Contracting Authority should develop sound environmental and social risk management plans before construction begins. Depending on the nature of the project, the Contracting Authority may need to retain the risk of unavoidable interference with affected parties and mitigate this through measures such as relocation (see also Resettlement under Social risk) and continued efforts to manage the social and political impact of the project on and around the site (possibly including a compensation regime for affected businesses adjacent to the road).
[Circumstance Dependent Risk]
The Private Partner will bear the risk of non-compliance with any contractual social risk obligations as well as social risk obligations set out in the underlying legal system, although even where social risk obligations are passed onto the Private Partner, the consequences of such risks occurring may come back to the Contracting Authority. For this reason, the Contracting Authority should critically analyse just what social risk obligations should be passed onto the Private Partner and what should be retained.
Where there is public opposition, there may be protestor action in both construction and operating phases, and/or issues safeguarding the site equipment and installation. See also Site security and Access to the site under Land availability, access and site risk, and Vandalism under Construction risk and Operating risk.
For a detailed analysis on how governments can better address aspects related to social inclusion in the delivery of infrastructure, see the GI Hub’s practical guidance on Inclusive Infrastructure and Social Equity.
Market Comparison Summary
This issue is coming under increasing focus from multilateral agencies, development finance institutions and other international finance parties, as well as civil society and human rights organisations. Finance parties (including commercial finance parties) will look very closely at how these risks are managed at both private and public sector level.
Many finance parties adhere to the Equator Principles, committing to ensure the projects they finance (and advise on) are developed in a manner that is both socially responsible and reflects sound environmental management practices (as described in the Equator Principles). The World Bank’s commitment to sustainable development is set out in its Environmental and Social Framework which includes standards that both it and its borrowers must meet in projects it is to finance.
In civil law jurisdictions the obligation upon the Contracting Authority to act “in the general interest” and to justify and document decisions may strengthen the stakeholder process. This is because the level of transparency and justification required should ensure that stakeholder views are properly taken into account and the risk of arbitrary decisions (and consequent challenges) reduced.
Resettlement
[Public Risk]
Depending on the nature of the project, the Contracting Authority may need to retain the risk of unavoidable interference with affected parties and mitigate this through measures such as relocation. This may include the removal of formal and/or informal housing or businesses and resettlement of communities in another location, potentially also with compensation.
[Circumstance Dependent Risk]
The Private Partner is responsible for implementing any social risk management measures contractually agreed – these should be clearly specified by the Contracting Authority in the procurement phase to enable the Private Partner to price the cost and associated risks.
Market Comparison Summary
Resettlement of whole communities by the Contracting Authority is more likely in less developed markets where informal housing and businesses may be more prevalent. The affected parties may not have the means (or the transport) to relocate themselves, even if paid compensation, and whole communities may need to be moved together. In developed markets, affected parties may be more able to rely on rights under compulsory acquisition/expropriation laws and compensation received.
Heritage / indigenous people
As with land use rights involving indigenous groups, any other social impact risks involving such groups will usually be the responsibility of the Contracting Authority but the Private Partner will bear the risk of complying with relevant legislation and contractual obligations.
In the absence of legislation, indigenous rights issues and community engagement may be managed by the Contracting Authority through the adoption of internationally recognised social and environmental standards and practices for the project, particularly if international financing options are desirable. See also Heritage/indigenous land rights under Land availability, access and site risk.
Market Comparison Summary
The Private Partner’s obligations with regards to indigenous rights is well legislated for in some markets and in other markets there may be more reliance on internationally recognised standards. See also Heritage/indigenous land rights under Land availability, access and site risk.
Industrial action
The Private Partner assumes the risk of labour disputes and strike action adversely affecting the project except to the extent such action falls into the category of political risk - the Contracting Authority may bear the risk (if a MAGA event) or share the risk (as a force majeure or relief event) for strikes and other widespread events of labour unrest. For example, nationwide and sector strikes are usually Contracting Authority risks, but strikes at the Private Partner’s facilities will be a Private Partner risk. See also Force majeure risk and MAGA risk.
Market Comparison Summary
In less politically stable jurisdictions the Contracting Authority may have to accept more risk for strikes than in some jurisdictions. In markets where the risk of strikes is low, the Private Partner may be comfortable accepting this risk as a relief event.