Performance/price risk

Water Desalination Water Desalination

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 water quality specifications and guaranteed water capacity.

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.

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

The onus falls upon the Contracting Authority to draft attainable standards based on relevant market data and requirements and policy objectives. Performance based on reliability, demonstrated water capacity and water availability, 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 at which the service should be undertaken, the Contracting Authority focuses on the precise service it wishes to procure and refines the performance regime (constituted by acceptance standards and tests, performance tests, performance standards and intake water quality requirements) with the bidders during the bid phase. These performance levels, once negotiated, constitute a key element of the risk transfer mechanism.

Penalty deductions from Capacity Payments for de-rating and outages are included in the concession agreement to support achievement of the performance standards.

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

In developed markets formulation of appropriate specifications and the private sector's ability to manage performance to those specifications will be more manageable.

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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 water quality specifications and guaranteed water capacity.

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 falls upon the Contracting Authority to draft attainable standards based on relevant market data and requirements and policy objectives. Performance based on reliability, demonstrated water capacity and water availability, can be measured against pre-determined schedules or standards.

The Private Partner (and the lenders and their technical advisers) will carefully review the proposed output specification in order to ensure that it is achievable. The Private Partner will test the proposed output specification during the bid clarification period (and sometimes even during the negotiation period post-bid submission).

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 at which the service should be undertaken, the Contracting Authority focuses on the precise service it wishes to procure and refines the performance regime (constituted by acceptance standards and tests, performance tests, performance standards and intake water quality requirements) with the bidders during the bid phase. These performance levels, once negotiated, constitute a key element of the risk transfer mechanism.

Penalty deductions from Capacity Payments for de-rating and outages are included in the concession agreement to support achievement of the performance standards.

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 Developed Market

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

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