Construction risk

Power transmission Power transmission

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 processes 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 facility is not operational by a nominated longstop date (except if caused by Contracting Authority assumed risk) 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 inspection, review and approval rights in relation to the design and the manufacture, installation and erection of plant and materials on and off the site.

Comparison with Developed Market

Associated risks that can affect construction costs, such as inflation, should also be considered. The Private Partner will generally price in this risk in economies where such risk can be projected and quantified.

Turnkey construction contracts and guaranteed completion dates, costs, and performance standards are often negotiated during project development.

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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.

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 processes 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 facility is not operational by a nominated longstop date (except if caused by Contracting Authority assumed risk) 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 inspection, review and approval rights in relation to the design and the manufacture, installation and erection of plant and materials on and off the site.

Comparison with Developed Market

In emerging markets, the Contracting Authority often has 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 (and operation) phase.

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