Maintenance risk

Toll Road Toll Road

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 forth in the performance 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.

Note that in demand-risk projects, the Private Partner takes the primary risk that the toll road will be maintained to a sufficient level of quality and reliability to ensure that it can continue to attract business. However where the toll road constitutes an essential public service or effective monopoly operation over that route, it would be sensible for the Contracting Authority to include appropriate key performance indicators to monitor the service levels and take effective enforcement action (e.g. through penalties or reduced toll revenue entitlements).

As regards existing structures, such as bridges, the maintenance risk should be allocated to the Private Partner to the extent the conditions of the bridges are known and future maintenance work can be assessed properly by an experienced contractor.

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

The Contracting Authority should take time to ensure that the documentation for existing bridges is up to date and a reliable basis for the calculation of the bidders.

In the event that the allowed load weight of the trucks is changed, the road may be subject to increased abrasion. This risk should sit with the Contracting Authority.

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

Adequate performance by the Private Partner can be 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 self-rectification of deficiencies.

The Private Partner will mitigate risks by appropriately allocating such risks to appropriate 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 reduces the benefits of the DBFO project model.

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 performance specification defined by the Contracting Authority.

Note that in demand-risk projects, the Private Partner takes the primary risk that the toll road will be maintained to a sufficient level of quality and reliability to ensure that it can attract business. However where the toll road constitutes an essential public service or effective monopoly operation over that route, it would be sensible for the Contracting Authority to include appropriate key performance indicators to monitor the service levels and take effective enforcement action (e.g. through penalties or reduced toll revenue entitlements).

Where there is integration of the toll road 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 ensure that the performance specification properly defines the maintenance obligations of 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 will effectively transfer risk back to the Contracting Authority.

The primary role of the Contracting Authority is to properly define the performance 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.

The Private Partner will mitigate risks by appropriately allocating such risks to appropriate subcontractors.

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 roads that integrate with the project.

Comparison with Developed Market

Some projects in emerging markets have been procured on a design-build 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 project components to allow the operator to manage the ongoing maintenance risk.

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