Construction risk

Hydro power Hydro power

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 all these risks, except where certain construction work is dependent on Contracting Authority work/related infrastructure work (e.g. transmission lines) being completed.

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

These risks can be mitigated through various means, including ensuring that the Private Partner has the requisite experience in the sector (demonstrated over a lengthy period) and obtaining appropriate security to the risk of non-performance (for example, parent company guarantees, performance bonds and letters of credit).

These mitigants can be implemented through the tendering, tender evaluation and due diligence processes and by way of the security provisions in the relevant documentation.

The power purchase agreement will also include limited rights to extend completion date and the right to terminate if the facility is not operational by a nominated longstop date (except if caused by Contracting Authority assumed risk).

The Private Partner shall seek to pass these risks to the contractors under the EPC contract.

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

The Contracting Authority (and the lenders) will have inspection, review and approval rights prior to the plant entering into commercial operations.

Comparison with Emerging Market

The Private Partner takes construction risk in developed and emerging markets. In developed markets, Contracting Authorities have less involvement in the construction process.

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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 all these risks, except where certain construction work is dependent on Contracting Authority work/related infrastructure work (e.g. transmission lines) being completed.

Private Partner takes labour dispute risk unless political in nature.

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

The Private Partner shall seek to pass these risks to the contractors under the EPC contract or O&M contract, as the case may be. Also, certain risks can be further mitigated through insurance.

Comparison with Developed Market

The Private Partner takes construction risk in developed and emerging markets. However in emerging markets, the Contracting Authority has more oversight, design approval rights and ability to witness commissioning and testing than in developed markets. Private Partners in emerging markets are able to share a greater degree of risk with the Contracting Authority in respect of politically motivated force majeure events that impact construction.

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