Completion (including delay and cost overrun) risk

Airport Airport

Description (What is the Risk)

The risk of commissioning the asset on time and on budget and the consequences of missing either of those two criteria.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will bear principal responsibility for delay and cost overrun risk, and will typically manage this through the engagement of a suitable EPC contractor.

The principal risk arising out of delay will be the loss of expected revenue, the ongoing costs of financing construction and extended site costs.

The Private Partner is best placed to integrate complex civil works, the delivery, integration and commissioning of the systems and machinery at the airport, despatching and operations, and preventative and lifecycle maintenance to ensure a reliable and punctual service for an efficient price. This may be managed through a single EPC joint venture or by the Private Partner managing a series of works, supply and operation/ commissioning contracts.

The Private Partner will be expected to demonstrate adequate system performance before it is given permission to operate the system. Airport projects require complex commissioning and testing regimes given the intricacies involved in ensuring that the check-in, customs, baggage handling and the wider system will meet the necessary reliability and punctuality and throughput requirements of the output specifications.

Many DBFO airport projects provide for the Private Partner to pay a periodic fixed and a variable concession fee (often based on gross revenue) to the Contracting Authority. In airport PPP projects in Colombia, for those concessions which have royalties in favour of the Contracting Authority, such royalty is standardized as a fixed percentage of a determined income of the Private Partner (eg. Gross Income). If the project is late in achieving completion then the Contracting Party will not receive the expected concession fees from the expected date. Therefore the Contracting Party will often seek to impose liquidated damages on the Private Partner to compensate the Contracting Authority for its loss.

Mitigation Measures (What can be done to minimize the risk)

The combination of (i) incentives or penalties for timely completion and (ii) the implementation of a 'longstop date' (a date which is pegged to a prescribed time period after the scheduled completion date) will create the necessary tension to incentivise timely completion while allowing the Private Partner a reasonable amount of time to meet its contractual responsibilities in spite of delays before the Contracting Authority can terminate the project.

Insurance will be taken out by the Private Partner that will compensate it in a number of circumstances where it is not entitled to compensation for extra costs (including liquidated damages) and loss of revenue from the Contracting Authority.

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority may have a critical role to play at stages of the construction, testing and commissioning process in terms of ensuring that any rights that it has to comment on design development and testing results do not adversely delay the project.

The Contracting Authority may allow for certain relief events, delay events, compensation events or force majeure events where delays or cost overruns have arisen from either the fault of the Contracting Authority, or no-fault events. The type of event will be relevant in relation to whether the Private Partner is entitled to just relief from termination, extra time to achieve completion or compensation for additional costs or loss of revenues due to the specific event.

Similarly the Contracting Authority may need to take responsibility for delays caused by the failure of public bodies to issue necessary consents in good time.

Transport to and from the new airport is usually extremely important and if the state is providing new road or rail links to the airport the Private Partner will need this to be provided on time for the opening or by a specific time thereafter if a build-up of traffic at the airport is envisaged that will necessitate such link(s) being provided at a later date.

Comparison with Emerging Market

In developed markets, enforcement of construction deadlines and budgets may be easier as the Private Partner will typically have more experience and reliable resources.

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Description (What is the Risk)

The risk of commissioning the asset on time and on budget and the consequences of missing either of those two criteria.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will bear principal responsibility for delay and cost overrun risk, and will typically manage this through the engagement of a suitable EPC contractor.

The principal risk arising out of delay will be the loss of expected revenue, the ongoing costs of financing construction and extended site costs. In addition to those risks, in Colombian PPP projects, the Private Partner will typically be subject to fines for delayed works, and even could be subject to trigger an event of default which may lead to the administrative lapsing of the contract.

The Private Partner is best placed to integrate complex civil works, the delivery, integration and commissioning of the systems and machinery at the airport and operations, and preventative and lifecycle maintenance to ensure a reliable and punctual service for an efficient price. This may be managed through a single EPC joint venture or by the Private Partner managing a series of works, supply and operation/commissioning contracts.

The Private Partner will be expected demonstrate adequate system performance before it is given the permit to operate the system. Airport projects require complex commissioning and testing regimes given the intricacies involved in ensuring that the check in customs, baggage handling and the wider system will meet the necessary reliability and punctuality and through put requirements of the Output Specification.

Many DBFO airport projects provide for the Private Partner to pay a periodic fixed and a variable concession fee (often based on gross revenue) to the Contracting Authority. If the project is late in achieving completion then the Contracting Party will not receive the expected concession fees from the expected date. Therefore the Contracting Party will often seek to impose liquidated damages on the Private Partner to compensate the Contracting Party for their loss.

Mitigation Measures (What can be done to minimize the risk)

It may be difficult for the Private Partner to mitigate these integration risks solely through contractual risk allocation, as the financing cost / lost revenue impact is typically very high compared to the individual component parts of the project that can affect this. Ensuring that the programme has sufficient float periods for all critical stages and that parties are incentivised to work together to achieve the common deadlines may be more effective strategies, particularly in markets where this may be the first time an asset of this nature has been procured.

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority may have a critical role to play at stages of the construction, testing and commissioning process in terms of ensuring that any rights that it has to comment on design development and testing results does not adversely delay the project.

The Contracting Authority may allow for certain relief events, delay events, compensation events or force majeure events where delays or cost overruns have arisen from either the fault of the Contracting Authority, or no-fault events. The type of event will be relevant in relation to whether the Private Partner is entitled to just relief from termination, extra time to achieve completion or compensation for additional costs or loss of revenues due to the specific event.

Similarly the Contracting Authority may need to take responsibility for delays caused by failure of public bodies to issue necessary consents in good time.

Comparison with Developed Market

Some emerging market airport projects have faced significant construction issues and the Contracting Authority will need to be prepared to enforce its rights to manage the consequences of a failure by the Private Partner to meet the construction milestones. The role of lenders and their advisers are important gauge for a Contracting Authority - if lenders accept the completion risk profile.

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