Resource or input risk

Airport Airport

Description (What is the Risk)

The risk that the supply of inputs or resources required for the operation of the project is interrupted or the cost increases.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears the principal responsibility to ensure an uninterrupted supply of inputs/resources for the project and to manage the costs of those inputs.

The management of costs is particularly important where the Private Partner is paying a periodic variable concession fee to the Contracting Authority based on gross, rather than net, revenue.

Therefore any increase in costs will not decrease the amount payable to the Contracting Party (possibly with some limited exceptions such as increases in tax or the pass through costs of utilities to airport users such as police, customs, air traffic control, etc.) but will reduce the amount available to pay the other costs of operations, service debt and provide a return to the Sponsors.

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

The Contracting Authority will be allowed to monitor the supply of required resources, and may allow for the Private Partner to substitute resources if necessary.

Some of the cost risk can be managed on demand-risk projects, such as airports, by passing the risk through to the user by way of increases in airport duties or other charges to airlines or users. However, the ability to do this may be limited as airport projects tend to be demand elastic (i.e. costs to airlines go up so they reduce flights to the airport and the revenue goes down).

Comparison with Emerging Market

Developed markets generally do not experience market volatility to the extent of emerging markets, and resource availability is less of a concern; however energy costs may still vary significantly over the course of project that must be accounted for.

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Description (What is the Risk)

The risk that the supply of inputs or resources required for the operation of the project is interrupted or the cost increases.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner bears the principal responsibility to ensure an uninterrupted supply of inputs/resources for the project and to manage the costs of those inputs.

The management of costs is particularly important where the Private Partner is paying a periodic variable concession fee to the Contracting Authority based on gross, rather than net, revenue.

Therefore any increase in costs will not decrease the amount payable to the Contracting Party (possibly with some limited exceptions such as increases in tax or the pass through costs of utilities to airport users such as police, customs, air traffic control, etc.) but will reduce the amount available to pay the other costs of operations, service debt and provide a return to the Sponsors.

There may be specific instances where the Private Partner may need the share this risk with the Contracting Authority, such as availability of energy supply, or reliance on local source materials where these may be affected by labour disputes, embargos or other political risks.

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

The Contracting Authority will be allowed to monitor the supply of required resources, and may allow for the Private Partner to substitute resources if necessary.

Some of the cost risk can be managed on demand-risk projects, such as airports, by passing the risk through to the user by way of increases in airport duties or other charges to airlines or users. However, the ability to do this may be limited as airport projects tend to be demand elastic (i.e. costs to airlines go up so they reduce flights to the airport and the revenue goes down).

Lenders may look to sponsors for completion support.

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

The Contracting Authority may need to stand behind the cost risk for certain inputs, or at least underwrite the Private Partner's financing for these costs.

Comparison with Developed Market

Emerging markets are generally more susceptible to market volatility and major cost variations.

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