Construction risk

Heavy rail Heavy rail

Description (What is the Risk)

Labour dispute. Interface/project management.
Commissioning damage.
IP right breach/infringement.
Quality assurance standards.
Defective material.
Latent defects.
Subcontractor disputes/insolvency.
Cost overruns where no compensation /relief event applies.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

No standard position.

In the case of rolling stock procurement, labour disputes may attract force majeure protection.

Project management obligations are imposed on each party.

Commissioning damage will be the Manufacturer's risk unless it occurs during testing carried out by the Operator or a third party.

MSAs contain detailed IP right provisions. Source Codes are usually placed into escrow on the terms of an industry standard contract, to be released on the occurrence of specified events such as Manufacturer insolvency.

Quality assurance standards are dealt with in the Manufacturer's obligation to supply rolling stock meeting a detailed technical specification and complying with applicable law and standards.

The Manufacturer takes the risk of defective materials, and latent defects (although these may be excluded in favour of a bespoke warranty regime).

The Manufacturer takes the risk of subcontractor disputes / insolvency.

The Manufacturer takes the risk of cost overruns unless a Mandatory Modification is required or a Variation is negotiated.

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

Varied.

Commissioning damage will be mitigated by insurance.

The other risks are the subject of negotiation between the parties.

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

Varied.

Comparison with Emerging Market

Varied.

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Description (What is the Risk)

Labour dispute. Interface/project management.
Commissioning damage.
IP right breach/infringement.
Quality assurance standards.
Defective material.
Latent defects.
Subcontractor disputes/insolvency.
Cost overruns where no compensation /relief event applies.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Private Partner assumes project management risk in rehabilitation/extension works where they are dependent on or integrated with Contracting Authority work/related infrastructure work.

Private Partner takes labour dispute risk unless political.

Private Partner takes risk of IP right infringement.

Private Partner required to construct to GIP standards.

Private Partner takes risk of cost overrun on rehabilitation or extension works where no compensation/relief event applies.

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

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

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 the permit to operate the system. Existing rail ROT 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 for completion of the works 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.

Late completion of rehabilitation or service extension works are most often addressed as lost opportunity for revenue by the Private Partner. There may also be a longstop date for completion.

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