Completion (including delay and cost overrun) risk

Power transmission Power transmission

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 to the Private Partner 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 the construction, energization and long-term operation and maintenance of the project to ensure reliable service. This may be managed through a single project joint venture / consortium or by the Private Partner managing a series of works, supply and operation/commissioning contracts.

The Private Partner will be expected to demonstrate readiness for energization before it is given permission to energize and operate the facilities.

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

The Contracting Authority will usually wish to implement a single-stage completion process for energizing the transmission 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 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.

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 (depending on whether such risk has been assumed by the Contracting Authority or the Private Partner).

Comparison with Emerging Market

In developed markets, enforcement of construction deadlines and budgets may be easier than in emerging markets as the Private Partner will typically have more experience and reliable resources, and will be more confident in its ability to enforce its rights.

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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 to the Private Partner 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 the construction, energization and long-term operation and maintenance of the project to ensure reliable service. This may be managed through a single project joint venture / consortium or by the Private Partner managing a series of works, supply and operation/commissioning contracts.

The Private Partner will be expected to demonstrate readiness for energization before it is given permission to energize and operate the facilities.

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

The Contracting Authority will usually wish to implement a single-stage completion process for energizing the transmission 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 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.

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 (depending on whether such risk has been assumed by the Contracting Authority or the Private Partner).

Comparison with Developed Market

Projects in emerging markets may face 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. 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.

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