Completion (including delay and cost overrun) risk

Heavy rail Heavy rail

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

Network Rail retains responsibility for the infrastructure and infrastructure upgrades.

The Manufacturer is responsible for delivery of the rolling stock in accordance with a specified timetable.

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

Network Rail's performance is scrutinised by ORR which enforces its Network Licence.

The Manufacturer is liable to pay liquidated damages for late delivery of rolling stock, usually to both the Operator and the rolling stock owner.

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

There is no direct Government support, except insofar as the UK Government provides a direct grant to Network Rail, and subsidises the agreed works programme of Network Rail. The Government also has a statutory duty to ensure the provision of railway passenger services on the UK rail network.

Comparison with Emerging Market

In relation to the infrastructure in the UK's developed rail market, Network Rail remains the party with the experience, resources and asset knowledge to take this risk.

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Description (What is the Risk)

The risk of commissioning the rehabilitation or extension works 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 associated with bringing rehabilitated services back in to operations, 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 some instances where the railway is taken over as a going concern the Private Partner's right to increase tariffs will not arise unless the new or upgraded works have been completed.

The Private Partner is best placed to integrate complex civil works, the delivery and commissioning of rolling stock, 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.

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.

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.

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

The management of completion risk is typically addressed by having either: (i) a scheduled completion date (with attached liquidated damages for delay) followed by a fixed concession period for operation, or (ii) the scheduled construction period forming part of the fixed concession period (with extensions for certain events such as force majeure). With the latter scenario, in emerging markets, the Contracting Authority may attempt to additionally impose delay liquidated damages on the Private Partner. However this decision should always be assessed against the likelihood that genuine out-of pocket costs will actually be incurred for such delay, so as to avoid unnecessary contingency being built into the project (which then increases the 'price').

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