Performance/price risk

Natural gas distribution Natural gas distribution

Description (What is the Risk)

The risk that the asset is unable to achieve the output specification metrics and the price or cost of doing so.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears the risk of achieving the performance specification such as gas quality specifications, gas flow and volumes.

The Contracting Authority bears the risk of enforcing the regime and for ensuring that the output specification is properly tailored to what the Private Partner can deliver.

Under a regulated returns model for such assets the Private Partner may be subject to abatement if performance based standards are not met.

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

The onus is on the Contracting Authority to draft attainable standards based on domestic and international gas standards, relevant market data and requirements and policy objectives. Performance based on gas quality, flow and volumes can be measured against pre-determined schedules or standards.

The relevant project documents/codes will contain clear key performance indicators, output specifications, appropriate financial damages for non-performance and transparent reporting requirements. In developing the outputs needed, and the desired performance levels for the network, the Contracting Authority should focus on the precise service it wishes to procure and refine the performance regime (constituted by acceptance standards and tests, performance tests and performance standards) with the bidders during the bid phase. These performance levels, once negotiated, will constitute a key element of the risk transfer mechanism.

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

Where certain performance indicators cannot be met due to actions by the Contracting Authority or unforeseen circumstances, the Private Partner may be eligible to seek relief and/or compensation.

Comparison with Emerging Market

For developed markets, there will be well developed minimum standards for the quality and flow rates of gas and acceptable performance standards.

The Private Partner will often be benchmarked against the performance achieved by other network operators and the tariff will include elements which fluctuate depending upon meeting KPIs and benchmarking against other operators.

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Description (What is the Risk)

The risk that the asset is unable to achieve the output specification metrics and the price or cost of doing so.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears the risk of achieving the performance specification such as gas quality specifications and guaranteed gas capacity. This will be subject to the Private Partner receiving within specifications gas volumes above the minimum levels required to operate the network.

The Contracting Authority bears the risk of enforcing the regime and for ensuring that the output specification is properly tailored to what the Private Partner can deliver.

Consideration needs to be given to the ability of the Private Partner to achieve the necessary performance levels given the nature of the project and the emerging market in which it will be based.

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

The onus is on the Contracting Authority to draft attainable standards based on domestic and, if relevant, international gas standards, relevant market data and requirements and policy objectives. Performance based on gas quality, flow and volumes can be measured against pre-determined schedules or standards.

The relevant project documents will contain clear key performance indicators, output specifications, appropriate financial damages for non-performance and transparent reporting requirements. In developing the outputs needed, and the desired performance levels for the network, the Contracting Authority should focus on the precise service it wishes to procure and refine the performance regime (constituted by acceptance standards and tests, performance tests and performance standards) with the bidders during the bid phase. These performance levels, once negotiated, will constitute a key element of the risk transfer mechanism.

In some markets, it may be appropriate to seek improved performance levels over time rather than expect the rehabilitated part of the system to immediately achieve much better performance than the entire gas system.

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

Where performance cannot be met due to actions by the Contracting Authority or events of Government action or inaction/Government/buyer risk events, the Private Partner may be eligible to seek relief and/or compensation.

Comparison with Developed Market

For emerging markets, particularly in the case of market first projects, the preparation of attainable standards by the Contracting Authority is often complicated by the lack of relevant and/or historical market data.

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