Completion (including delay and cost overrun) risk

Natural gas distribution Natural gas distribution

Description (What is the Risk)

Risk of commissioning the asset on time and on budget.
Risk of performance shortfalls.
Impact of completion risks.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will bear principal responsibility for delay cost overrun and performance risks.

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 circumstances, there will be significant risks posed to upstream and downstream gas suppliers and users.

Given the nature of a gas distribution system, the Private Partner is best placed to provide all procurement, construction and commissioning of the rehabilitation works across the entire project. This is generally managed through the engagement of a single EPC contractor or EPC consortium. In some circumstances certain works may be performed by the Contracting Authority, such as connection works or reinforcement or upgrade works adjacent to the ROT project.

The Private Partner will be expected to demonstrate that the facility is substantially complete and meets the minimum performance levels before it is given permission to enter into commercial operation. Gas distribution projects require detailed commissioning and testing regimes to ensure that the facility meets the output, gas quality, efficiency and environmental requirements set by the minimum functional / performance specifications under the gas transportation agreement, Gas Code and other applicable legislation.

If additional interconnection facilities are required for the project (such as new or upgraded connections to the gas supply network), construction of these additional facilities may also be included within the Private Partner's scope of responsibility, transferring the risk of delays and cost overruns in the construction to the Private Partner. Ownership and responsibility for operation and maintenance of these additional facilities will be transferred to the Contracting Authority on completion of construction and commissioning, subject to the Private Partner's defect rectification obligations during the prescribed warranty period.

Separate testing and taking over requirements are generally set out for additional interconnection facilities transferred to the Contracting Authority on completion.

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

The Contracting Authority will usually wish to implement a single stage completion process for commissioning the rehabilitated facilities. This will depend upon the nature of the project and in some circumstances the ROT project will be commissioned in defined stages, for example, a network which is supporting gas distribution to several different cities or industrial users 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 incentives for 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.

If the Contracting Authority is responsible for providing or procuring any new or upgraded interconnection facilities, the Contracting Authority will seek to put in place arrangements to ensure that those facilities are procured or upgraded in sufficient time to enable the performance by the Private Partner of its obligations. If the Contracting Authority is unable to complete such works on time it may be liable to compensate the Private Partner for the impact of such delays. However, the Contracting Authority's liability will be minimal when compared to the value of the project.

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

The Contracting Authority will generally 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.

Comparison with Emerging Market

In developed markets, the Private Partner will typically be responsible for familiarising itself with permitting and consenting requirements and the Contracting Authority will typically accept little (if any) risk for delays associated with obtaining those.

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Description (What is the Risk)

Risk of commissioning the asset on time and on budget.
Risk of performance shortfalls.
Impact of completion risks.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will bear principal responsibility for delay, cost overrun and performance risk.

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

Given the nature of a gas distribution system, the Private Partner is best placed to provide all procurement, construction and commissioning of the rehabilitation works across the entire project. This is generally managed through the engagement of a single EPC contractor or EPC consortium. In some circumstances there will be significant risks posed to upstream and downstream gas suppliers and users.

The Private Partner will be expected to demonstrate that the facility is substantially complete and meets the minimum performance levels before it is given permission to enter into commercial operation. Gas distribution projects require detailed commissioning and testing regimes to ensure that the facility meets the output, gas quality, efficiency and environmental requirements set by the minimum functional / performance specifications under the gas transportation agreement and other applicable legislation.

If additional interconnection facilities are required for the project (such as a new substation to supply electricity or new or upgraded connections to the gas supply network), construction of these additional facilities may also be included within the Private Partner's scope of responsibility, transferring the risk of delays and cost overruns in the construction to the Private Partner. Ownership and responsibility for operation and maintenance of these additional facilities will be transferred to the Contracting Authority on completion of construction and commissioning, subject to the Private Partner's defect rectification obligations during the prescribed warranty period.

Separate testing and taking over requirements are generally set out for additional interconnection facilities transferred to the Contracting Authority on completion.

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

The Contracting Authority will usually wish to implement a single stage completion process for commissioning the rehabilitated facilities. 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 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.

If the Contracting Authority is responsible for providing or procuring any new or upgraded interconnection facilities, the Contracting Authority should ensure that those facilities are procured or upgraded in sufficient time to enable the performance by the Private Partner of its obligations.

If the Contracting Authority is delayed in completion of its works and this has any impact on the Private Partner it will be required to compensate the Private Partner for any of the costs incurred.

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

The Contracting Authority will generally 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 Developed Market

In emerging market gas distribution projects there is increased risk of delays arising from unanticipated events during the construction phase and unreliable resources. Ensuring a realistic time frame at project out set rather than an ambitious or desired time frame may save time and money for all parties in the long run.

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 lenders may expect to receive termination compensation where the Private Partner is in default 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 period for operation commencing on the actual completion date, or (ii) the scheduled construction period forming part of the fixed operation 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 delays will actually lead to losses being suffered, so as to avoid unnecessary contingency being built into the project (which then increases 'price').

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