Construction risk

Light rail Light rail

Description (What is the Risk)

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

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner assumes project management risk unless certain work is dependent on Contracting Authority work/related infrastructure work being completed in which case risk could be shared.

The Private Partner takes labour dispute risk unless such labour disputes are political in nature or, in some jurisdictions, nationwide.

The Private Partner also takes Subcontractor insolvency risk or the risk of a dispute with its Subcontractor causing delay.

The Private Partner takes the risk of IP right infringement.

The Private Partner is required to design and construct to good industry practice standards and may be required to comply with or develop other quality assurance programmes or standards.

The Private Partner will generally have an obligation to rectify defects/defective work. There may be some sharing of risk in respect of latent defects (for example, in existing assets or where due to the nature of the site it is not reasonable to expect the Private Partner to assess this risk prior to contract award.).

The Private Partner takes risk of cost overruns where no compensation or relief event regime applies.

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.

The Contracting Authority may seek to enter into direct IP arrangements with the light rail stock designer/manufacturer to ensure it retains necessary IP rights in the event of Private partner IP infringement.

Comparison with Emerging Market

In developed markets risk is considered manageable through robust pass through of obligations to credible and experienced subcontractors and by appropriate timetable and budget contingency.

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Description (What is the Risk)

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

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner assumes project management risk unless certain work is dependent on Contracting Authority work/related infrastructure work being completed in which case the construction risk could be shared.

The Private Partner takes labour dispute risk unless such labour disputes are political in nature or, in some jurisdictions, nationwide.

The Private Partner also takes Subcontractor insolvency risk or the risk of a dispute with its Subcontractor causing delay.

The Private Partner takes the risk of any IP right infringement.

The Private Partner is required to design and construct to good industry practice standards and may be required to comply with or develop other quality assurance programmes or standards.

The Private Partner will generally have an obligation to rectify defects/defective work. There may be some sharing of risk in respect of latent defects (for example, in existing assets or where due to the nature of the site it is not reasonable to expect the Private Partner to assess this risk prior to contract award).

The Private Partner takes risk of cost overruns where no compensation or relief event regime applies.

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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