Completion (including delay and cost overrun) risk

Light rail Light 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

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, holding costs of other contractors and extended site costs.

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.

The Private Partner will be expected to demonstrate adequate system performance before it is given permission to operate the system. Light rail projects require complex commissioning and testing regimes given the intricacies involved in ensuring that the rolling stock, power systems, signalling systems, operations centre and the wider system will meet the necessary reliability and punctuality requirements of the output specifications.

A Dutch project follows the same principles regarding responsibility, risk allocation and possible relief events (i.e. delay events, delayed completion events and compensation events).A look forward test applies in the event it has become evident that the commissioning shall not be achieved within the set timeframe. This can lead to termination of the contract.

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

The Contracting Authority may wish to implement a multi-staged completion process to ensure the Private Partner begins receiving payment for its design and construction services once significant components of the project are substantially completed. This can help increase cash flow during construction, reduce the Private Partner's financing costs and incentivize the phasing of construction works in order to ensure critical components are completed on time. Financial penalties and liquidated damages can help enforce construction deadlines.

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 incentivize 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.

The Contracting Authority may also consider the inclusion of a look forward test to trigger a default if an independent party certifies that completion will not be achieved by the longstop date.

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 or force majeure events where delays or cost overruns have arisen from either the fault of the Contracting Authority, or no-fault events.

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.

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 or EPCM 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 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.

The Private Partner will be expected demonstrate adequate system performance before it is given the permit to operate the system. Light rail projects require complex commissioning and testing regimes given the intricacies involved in ensuring that the rolling stock, power systems, signalling systems, operations centre and the wider system will meet the necessary reliability and punctuality requirements of the Output Specification.

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

Some emerging market rail 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. In an emerging market context the dynamics may be different if the lenders have a significant underwrite of their senior debt.

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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