Construction risk

Natural gas distribution Natural gas distribution

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

The Private Partner assumes all construction risks.

The concession agreement will typically address construction risk as part of the termination regime.

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 process and by way of the security provisions in the relevant documentation.

The concession agreement may also include limited rights to extend completion date, the right to terminate if the upgraded facility and network is not operational by a nominated longstop date (except if caused by a Government risk event) and step in rights for the Contracting Authority.

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

The Contracting Authority (and the lenders) will have limited inspection, review and approval rights in relation to the design and construction of the works to the facility and the network.

Comparison with Emerging Market

In developing markets, the Contracting Authority may have the right to step into the project to remedy chronic or emergency situations, including gas quality and public health issues.

In developed markets construction 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.
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

The Private Partner assumes all construction risks unless the risks related to actions by the Contracting Authority or otherwise fall within force majeure, natural or political.

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 process and by way of the security provisions in the relevant documentation.

The concession agreement will also include limited rights to extend completion date, the right to terminate if the upgraded facility and network is not operational by a nominated longstop date (except if caused by a Government risk event) and step in rights for the Contracting Authority.

Insurance will mitigate the impact of certain construction risks.

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

It is common for the Private Partner to have detailed reporting requirements which provide the Contracting Authority with regular updates as to consents and give early warning rights of any material delays.

Comparison with Developed Market

In emerging markets, the Contracting Authority may have the right to step into the project to remedy chronic or emergency situations, and also to engage a replacement contractor to rectify, remedy or address any issues, during the construction phase.

In emerging markets, the Contracting Authority may accept greater flexibility in the construction timetable so that the risk of delays can be accommodated without penalising the Private Partner.

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