Maintenance risk

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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 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 soft services (e.g. cleaning, security, minor management services, etc.) where economical.

Note that on demand-risk projects, the Private Partner takes the primary risk that the system will be maintained to a sufficient level of quality and reliability to ensure that it can attract business. 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 or reduced farebox entitlements).

Where there is integration of the system into existing infrastructure, the Contracting Authority may need to retain the maintenance risk associated with some of the existing assets.

In a Dutch project, which is availability-based, the infrastructure is to be kept in accordance with the requirements as set out in the output specifications. The Private Partner also has to build the municipal infrastructure surrounding the tram infrastructure, but the maintenance of the municipal infrastructure is transferred on completion. Through deductions on the availability payable by the Contracting Authority to the Private Partner, the Contracting Authority can enforce maintenance requirements (e.g. if performance standards are not met).

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.

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

Further, the Contracting Authority may establish a facilities management committee to oversee the Private Partner's performance of the maintenance and rehabilitation services, along with a formal mechanism to discuss and resolve performance related issues.

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 adjust payment to the Private Partner based on meeting or failing to meet certain performance standards. There may also be other remedies such as warning notices and right to 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 DBFOM project model.

The Contracting Authority may be required to guarantee and proactively manage the maintenance of the existing systems that integrate with the project.

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 incentivizing 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.

Note that on demand-risk projects, the Private Partner takes the primary risk that the system will be maintained to a sufficient level of quality and reliability to ensure that it can attract business.

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 or reduced farebox entitlements).

Where there is integration of the system into existing infrastructure, the Contracting Authority may need to retain the maintenance or latent defect risk of some of the existing assets and fit for purpose standards appropriately adjusted.

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.

Failure to get the output specification right for the project effectively transfers the risk back to the Contracting Authority.

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

The Contracting Authority may be required to guarantee and proactively manage the maintenance of the existing systems that integrate with the project.

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 rolling stock to allow the operator to manage the ongoing maintenance risk.

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