Maintenance risk

Airport Airport

Description (What is the Risk)

The risk of maintaining the asset to the appropriate standards and specifications for the life of the project.
Increased maintenance costs due to increased volumes.
Incorrect estimates and cost overruns.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will have principal responsibility for meeting the appropriate standards regarding maintenance as set out in the output specifications defined by the Contracting Authority.

The Private Partner generally assumes the overall risk of periodic and preventative maintenance, emergency maintenance work, work stemming from design or construction errors, rehabilitation work, and in certain project model instances, work stemming from implementing technological or structural changes.

The Contracting Authority may retain the responsibility of performing certain services at the airport which it believes are appropriate or which by law cannot be provided by the Private Partner. These may include security and police, customs and border control and fire services. The Private Partner may be required to provide suitable accommodation for these people at the airport either for free or at cost.

The Private Partner takes the primary risk that the airport and its systems will be maintained to a sufficient level of quality and reliability to ensure that it can attract passengers and airlines. However where the system constitutes an essential public service or effective monopoly operation over that route, it would be sensible for the Contracting Authority to include appropriate KPIs to monitor the service levels and take effective enforcement action (e.g. through penalties).

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

The Contracting Authority should take time to ensure that the output specification properly defines the maintenance obligations on the Private Partner to ensure that the system remains robust in the event of early termination or expiry of the concession agreement. There will be requirements that will need to be met by the Private Partner on hand back and a reserve account or bonding may be required to be provided by the Private Partner as security for its obligations.

The primary role of the Contracting Authority is to properly define the output specifications and level of services required of the Private Partner.

Adequate performance by the Private Partner can be further enforced by ensuring that the payment mechanism considers quality and service failures. The Contracting Authority will be allowed to require additional payment from the Private Partner based on failing to meet certain performance standards. There may also be other remedies such as warning notices and right to require replacement of replace subcontractors.

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

Generally speaking, the Contracting Authority's undue interference with the Private Partner's provision of maintenance and rehabilitation services (with the exception of minor management services) reduces the benefits of the DBFO project model.

The required performance standard KPIs for an airport will often include KPIs relating to the experience and availability at check in, in customs/immigration and security. If these functions are not fully under the control of the Private Partner and failure to meet the relevant KPI may be due to lack of performance by a public sector retained service (such as insufficient people at immigration gates or security) so that throughput targets are not met, then the Private Partner may require relief from any penalties. In some cases if this causes cost or loss of revenue to the Private Partner it may be a compensation event.

Comparison with Emerging Market

In developed markets, the involvement of the Private Partner in the operation, maintenance and rehabilitation of the project provides several benefits by incentivising greater care and diligence by the Private Partner in the construction phase, and increasing the useful life of the infrastructure.

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Description (What is the Risk)

The risk of maintaining the asset to the appropriate standards and specifications for the life of the project.
Increased maintenance costs due to increased volumes.
Incorrect estimates and cost overruns.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner will have principal responsibility for maintaining the system to the appropriate standards set out in the output specification defined by the Contracting Authority.

The Private Partner generally assumes the overall risk of periodic and preventative maintenance, emergency maintenance work, work stemming from design or construction errors, rehabilitation work, and in certain project model instances, work stemming from implementing technological or structural changes.

The Contracting Authority may retain the responsibility of performing certain services at the airport which it believes are appropriate or which by law cannot be provided by the Private Partner. These may include security and police, customs and border control and fire services. The Private Partner may be required to provide suitable accommodation for these people at the airport either for free or at cost.

The Private Partner takes the primary risk that the airport and its systems will be maintained to a sufficient level of quality and reliability to ensure that it can attract passengers and airlines. However where the system constitutes an essential public service or effective monopoly operation over that route, it would be sensible for the Contracting Authority to include appropriate KPIs to monitor the service levels and take effective enforcement action (e.g. through penalties).

Even though under a Colombian PPP project perspective this risk is also allocated as a Private Partner risk, a typical distinction is made between the airport concessionaire and the airport operator. Despite that the airport concessionaire as the awarded contractor for the project is the primarily responsible for the maintenance of the infrastructure/assets, the airport operator, as a different legal person in many cases, is joint and severally liable for those same risks. Additionally, in certain specific cases, the concessionaire of the airport is different form the concessionaire of the runways. In this case, the maintenance risk is allocated to each concessionaire regarding the concession specific scope.

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

The Contracting Authority should take time to ensure that the output specification properly defines the maintenance obligations on the Private Partner to ensure that the system remains robust in the event of early termination or expiry of the agreement.

There will be requirements that will need to be met by the Private Partner on hand back and a reserve account or bonding may be required to be provided by the Private Partner as security for its obligations.

The primary role of the Contracting Authority is to properly define the output specifications and level of services required of the Private Partner.

Adequate performance by the Private Partner can be further enforced by ensuring that the payment mechanism considers quality and service failures. The Contracting Authority will be allowed to require additional payment from the Private Partner based on failing to meet certain performance standards. There may also be other remedies such as warning notices and right to require replacement of replace subcontractors.

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

Generally speaking, the Contracting Authority's undue interference with the Private Partner's provision of maintenance and rehabilitation services (with the exception of minor management services) reduces the benefits of the DBFO project model.

The required performance standard KPIs for an airport will often include KPIs relating to the experience and availability at check in, in customs/immigration and security. If these functions are not fully under the control of the Private Partner and failure to meet the relevant KPI may be due to lack of performance by a public sector retained service (such as insufficient people at immigration gates or security) so that throughput targets are not met, then the Private Partner may require relief from any penalties. In some cases if this causes cost or loss of revenue to the Private Partner it may be a compensation event.

Comparison with Developed Market

Some projects in emerging markets have been procured on a D&B basis with a view to then passing over the assets to an operations concessionaire. In this case the Contracting Authority will need to ensure that it has sufficient warranties of the system components and equipment to allow the operator to manage the ongoing maintenance and performance risk.

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