Maintenance risk

Water Distribution Water Distribution

Description (What is the Risk)

The risk of maintaining the asset to the appropriate standards and specifications for the life of the project.
Incorrect estimates and cost overruns.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

As occupier and operator of the facility until its transfer to the Contracting Authority at the end of the term, the Private Partner will have responsibility for meeting the maintenance requirements defined by the Contracting Authority during the bidding process and/or in the raw water supply agreement.

In addition to specific maintenance requirements imposed by the Contracting Authority, the Private Partner will be responsible for maintaining the facility so as to meet the contractual levels of quality, availability and volume of output required to secure its revenue stream.

The Private Partner generally assumes the risk of all maintenance, including periodic and preventative maintenance, emergency maintenance work, work stemming from design or construction errors and all rehabilitation work.

Maintenance events affecting the availability of the facility and impacting on supply are generally scheduled by agreement with the Contracting Authority and scheduled maintenance may be prohibited during times of peak demand.

The Contracting Authority generally retains the risk of certain events impacting the project (such as political risk and regulatory / change in law risk). In this case, the Contracting Authority may be required to provide relief to the Private Partner for the impacts on the project of additional maintenance required by those events (including the additional costs of maintenance), but responsibility for performance of the maintenance remains with the Private Partner.

The Contracting Authority may retain the maintenance risk associated with the infrastructure connecting with the facility, such as the water supply pipe delivering the water to the facility's delivery point. It is usual for the Contracting Authority to also assume responsibility for all maintenance of the facility on its transfer to the Contracting Authority at the end of the term.

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

The Contracting Authority should take time to ensure that the raw water supply agreement properly defines the thresholds for the supply of water into the facility and the Private Partner's obligations from that point.

Additionally, the arrangements should properly define the maintenance obligations on the Private Partner to ensure that the facility is properly maintained throughout the life of the project, to ensure that the facility is in a satisfactory condition in the event of early termination or on expiry of the agreement, at which point the facility will be transferred to the Contracting Authority. The Contracting Authority should also consider whether any long term services or supplies should be secured for the facility.

Subject to the requirements of the Private Partner's financing parties, the Contracting Authority should consider specific requirements in relation to the use of property damage insurance to reinstate the facility.

Adequate performance by the Private Partner will be further enforced by ensuring that the payment mechanism reflects the Private Partner's ability to meet the contractual levels of volume, availability and quality and by including termination triggers for material performance shortfalls.

There may also be specific transfer provisions providing for the condition of the facility to be assessed during the last few years of the project. The Private Partner will then be required to carry out any remedial work necessary to ensure that the facility meets the required standards on the date of transfer to the Contracting Authority at the end of the term.

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

Generally, the Contracting Authority's role will be limited to defining minimum maintenance requirements, ensuring that these are met and enforcing for rectification if they are not.

The Contracting Authority may be required to maintain interconnections with the facility, such as the water supply system

Comparison with Emerging Market

In developed markets, the involvement of the Private Partner in the operation and maintenance of the project provides several benefits by incentivising greater care and diligence by the Private Partner in the rehabilitation works (construction) phase to ensure the operational life of the facility and that operation and maintenance considerations are appropriately considered in the design of the rehabilitation works.

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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.
Incorrect estimates and cost overruns.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

As occupier and operator of the facility until its transfer to the Contracting Authority at the end of the term, the Private Partner will have responsibility for meeting the maintenance requirements defined by the Contracting Authority during the bidding process and/or in the raw water supply agreement.

In addition to specific maintenance requirements imposed by the Contracting Authority, the Private Partner will be responsible for maintaining the facility so as to meet the contractual levels of quality, availability and volume of output required to secure its revenue stream.

The Private Partner generally assumes the risk of all maintenance, including periodic and preventative maintenance, emergency maintenance work, work stemming from design or construction errors and all rehabilitation work (including latent defects).

Maintenance events affecting the availability of the facility and impacting on supply are generally scheduled by agreement with the Contracting Authority and scheduled maintenance may be prohibited during times of peak demand.

The Contracting Authority generally retains the risk of certain events impacting the project (such as political risk and regulatory / change in law risk). In this case, the Contracting Authority may be required to provide relief to the Private Partner for the impacts on the project of additional maintenance required by those events (including the additional costs of maintenance), but responsibility for performance of the maintenance remains with the Private Partner.

The Contracting Authority may retain the maintenance risk associated with the infrastructure connecting with the facility, such as the water supply pipe delivering the water to the facility's delivery point. It is usual for the Contracting Authority to also assume responsibility for all maintenance of the facility on its transfer to the Contracting Authority at the end of the term.

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

The Contracting Authority should take time to ensure that the raw water supply agreement properly defines the thresholds for the supply of water into the facility and the Private Partner's obligations from that point.

Failure to get the thresholds right for the project effectively transfer risk back to the Contracting Authority.

Additionally, the arrangements should properly define the maintenance obligations on the Private Partner to ensure that the facility is properly maintained throughout the life of the project, to ensure that the facility is in a satisfactory condition in the event of early termination or on expiry of the agreement, at which point the facility will be transferred to the Contracting Authority. The Contracting Authority should also consider whether any long term services or supplies should be secured for the facility.

Subject to the requirements of the Private Partner's financing parties, the Contracting Authority should consider specific requirements in relation to the use of property damage insurance to reinstate the facility.

Adequate performance by the Private Partner will be further enforced by ensuring that the payment mechanism reflects the Private Partner's ability to meet the contractual levels of volume, availability and quality and by including termination triggers for material performance shortfalls.

There may also be specific transfer provisions providing for the condition of the facility to be assessed during the last few years of the project. The Private Partner will then be required to carry out any remedial work necessary to ensure that the facility meets the required standards on the date of transfer to the Contracting Authority at the end of the term.

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

Generally, the Contracting Authority's role will be limited to defining minimum maintenance requirements, ensuring that these are met and enforcing for rectification if they are not.

The Contracting Authority may be required to maintain interconnections with the facility, such as the water supply system.

Comparison with Developed Market

In developed markets, the involvement of the Private Partner in the operation and maintenance of the project provides several benefits by incentivising greater care and diligence by the Private Partner in the rehabilitation works (construction) phase to ensure the operational life of the facility and that operation and maintenance considerations are appropriately considered in the design of the rehabilitation works.

Additionally, in emerging markets, the Contracting Authority should consider its ability to take on responsibility for maintenance following the transfer of the facility on early termination or expiry and whether provisions should be put in place to support the necessary transfer of expertise and/or personnel in the short term.

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