Resource or input risk

Light rail Light rail

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.

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.

The Private Partner may be incentivized, through a sharing mechanism, to increase efficiencies in energy consumption throughout the concession period.

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

Monthly payments to the Private Partner may include certain calculations that could alleviate uncontrollable cost increases due to increases in energy costs that would otherwise be borne by the Private Partner.

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.

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.

Time and cost risks are normally passed on to the Private Partner's subcontractors.

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

Some of the cost risk can be managed on demand-risk projects by passing the risk through to the user by way of fare adjustments, but the ability to do this may be limited as light rail projects tend to be highly demand elastic (i.e. fares go up and ridership 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. See comment on exchange rate for a light rail project in emerging markets.

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