Construction risk

Water Desalination Water Desalination

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 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 programs 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 interface 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 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.
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, save for possibly extreme forms of labour disputes which can be construed as risk assumed by the Contracting Authority in certain circumstances or force majeure etc.

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 instigated 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(s), the right to terminate if the plant 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 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.

The Contracting Authority may provide time and cost relief in relation to certain types of extreme forms of labour disputes and also to step-in and take over responsibility for the project in certain circumstances.

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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