Energy

Summary Matrix

Cautionary note: The summary matrix identifies typical risk allocation on an aggregated basis. For each risk allocation, however, there are generally exceptions. For the full discussion on typical risk allocation arrangements, please see the detailed guidance provided in the matrix below.

Purpose of Matrix

This page contains a matrix of risks typically found in a hydro power PPP transaction, together with guidance on how those risks are typically allocated between the Contracting Authority and the Private Partner, the rationale for such risk allocation, mitigation measures and possible government support arrangements. It aims to provide governments (and, additionally, private sector stakeholders) with targeted guidance on the appropriate allocation of project risks in a PPP contract.

Cautionary Note

This matrix contains an indicative - but not exhaustive - list of the main risks typically to be considered in hydro power PPP projects and their typical allocation between the Contracting Authority and the Private Partner. It may be used as a starting point for understanding the risk allocation issues commonly arising in hydro power projects and for developing an individual risk matrix for the project in question. A project’s individual circumstances and its jurisdiction will influence the appropriate contractual risk allocation and there may be additional risks that need to be considered. 

See Detailed Risk Identification and Analysis in the Introduction.

Key Risks

  • Land acquisition and social risk: Large areas of land may need to be acquired for a project featuring a dam and reservoir. If local populations historically used lands that will be affected by the project (irrespective of whether they have firm legal title to those lands), lenders may require that this be considered as part of the land acquisition process. Further, if the Contracting Authority needs to use its legislative powers to acquire the site (e.g. through expropriation / compulsory acquisition), this may increase social risk and other opposition to the project (e.g. due to delay caused by court cases). See Land availability, access and site risk, and Community and business and Resettlement under Social risk, Suitability of design under Design risk, Project management and interface with other works/facilities under Construction risk and Maintenance standards under Operating risk.

  • Environmental risk: Environmental scrutiny is increasing around the world. The Contracting Authority and the Private Partner must develop sound environmental management plans before construction begins. See Environmental risk.

  • Completion/operation commencement risk: Hydro power projects often involve significant civil works in remote and undeveloped/unsurveyed terrains. Such works may be more difficult to deliver on-time and on-budget than projects involving a straightforward installation of plant and equipment. In particular, it may be difficult for a Private Partner to commit to delivering significant tunnelling works without some form of risk sharing with Contracting Authority. See Cost increases and Works completion delays under Construction risk.

  • Operational resource or input risk: Hydrological risk is the main input risk for hydro power projects once they are operational. The sufficiency of the water supply should be assessed by reference to detailed and accurate historical records maintained over a long period of years. The parties should also consider the impact of seasonality on the generation capacity of the project throughout the year (particularly for run-of-river projects), and whether climate change or third party activities upstream from the project might adversely impact the hydrological conditions at the site. See Climate change event under Environmental risk and Operational resources or input risk under Operating risk.

  • Conflict risk: Many hydro power projects are located in remote locations with less central government control. Such locations may be more prone to local conflicts and this risk should be assessed for each project. See Site security under Land availability, access and site risk, and Force majeure risk.

Type of Project and Scope Considerations

This matrix addresses the common risks for the build, own, finance, operation and transfer to the Contracting Authority (at the end of the PPP contract) of a new large-scale (greater than 100MW) hydroelectric power project.

The project may feature a large dam and reservoir; and may require extensive tunnelling works to divert water to the power station.

The project scope may include building associated infrastructure. This might include electricity transmission infrastructure which is then handed over to the state owned offtaker. It might also include roads to and around the project site, some of which may be turned over to the relevant authorities.

Assumptions

The Private Partner finances the development of the new hydroelectric power project and only starts to receive payment from the Contracting Authority (and/or where applicable, users) once the hydroelectric power project is in operation.

Site selection is determined by the Contracting Authority.

100% of the available electricity from the project will be purchased by the Contracting Authority (a state owned electricity offtaker under a long term power purchase agreement).

The Contracting Authority is responsible for dispatching the project (either by the state owned offtaker or another state owned entity which will act as the dispatch, transmission and distribution licensee).

The project will connect to the existing transmission lines and electricity distribution system which the Contracting Authority owns (or will own to the extent the Private Partner has built transmission infrastructure that is to be transferred to the Contracting Authority once completed).

The project will not feature any pumped storage.

Market Approaches

In addition to the common approach outlined in this matrix for large-scale hydro power projects (which are often in remote areas where there is no network and the network is built for the specific project and linked to a state owned offtaker), other types of hydro power projects include much smaller scale projects, again often in isolated areas which cannot be reached economically by a national electricity distribution network or where there is no such network. Types of projects also include run-of-river projects (where there may be no or limited reservoir storage involved) and pumped-storage projects (where water is pumped into a higher reservoir at times of low electricity demand and released to a lower reservoir through a turbine when electricity demand is higher). Market regulation varies from country to country.

The risks and associated guidance included in this matrix will be relevant to different contractual structures and procurement models, but will need to be adapted appropriately taking into account the scope and duration of the relevant contract and financing methods (such as whether there is a need for long term third party lending and how the pricing mechanism works).

Project Revenues, Including Payment Mechanisms

Hydro power projects are usually considered as “economic infrastructure” with revenues of the Private Partner (i.e. a hydro power company) coming from the power purchased by the country’s power utility provider under a long-term power purchase agreement (usually a partially or fully state owned offtaker). The Private Partner is generally entitled to develop and operate the hydro power project by the Contracting Authority by way of the grant of exclusive rights under concession-type contracts (for example, to divert and/or impound water). These exclusive concession rights may be granted under a power purchase agreement with the state owned offtaker or, depending on the jurisdiction, may need to be granted by another Contracting Authority (such as the ministry of energy) with the power to grant such rights. The Private Partner raises debt usually through multilaterals, development finance institutions and local commercial banks (or commercial banks with links to the sponsors of the Project) and private equity, and receives payments, similar to availability based payments, from the Contracting Authority (usually the power utility provider) structured as a “capacity payment” or an “energy charge”, or a combination of both. As for all energy assets, hydro power PPP projects are highly dependent, for their financial structure and bankability, on the relevant energy regulator and other relevant regulations and public policy (for example, any regulation of tariffs, the length of the PPA term or requirements for competitive bidding of projects). See General Principles under Demand Risk.

Other Considerations

Local content requirements: When considering whether a Private Partner should be obliged to source a certain percentage of its workforce and materials locally, the Contracting Authority should consider whether this might prevent the Private Partner from having access to the:

(i) necessary technical expertise to deliver all aspects of the project including: design, construction, operation, and management of environmental and social requirement compliance; and

(ii) volume of skilled and unskilled personnel that will be needed during construction (considering among others, whether such local personnel are already engaged on other projects in-country).

Private Sector Risk Mitigation

Allocation of risks to sub-contractors: See Risk Allocation in PPP contracts in the Introduction and Cost increases and Works completion delays under Construction risk. As regards construction, the Private Partner will often enter into one or more construction contracts with construction sub-contractors to pass down its obligations under the PPP contract and to manage the risk of cost increases and delays (subject to certain relief to which the sub-contractors will be entitled under the sub-contracts). In hydro power projects it is not unusual to see a disaggregation of the works into separate construction contracts for civil works, electrical and mechanical works and hydro-mechanical works. There might also be separate construction contracts for any required supporting electricity transmission infrastructure and roads. To support non- or limited- recourse financing these construction contracts will generally be priced on a fixed lump sum basis, although exceptions to this may be necessary where there is any uncertainty on the scope of works (e.g. if there is significant tunnelling works through uncertain rock types). The Private Partner will bear the risk of interfaces in any multi-contract structure, liability caps agreed under the sub-contracts being reached, and warranty periods under the sub-contracts being shorter than the Private Partner’s defect rectification obligations towards the Contracting Authority. The Private Partner will similarly typically enter into an agreed price operating sub-contract with an operating sub-contractor to pass down its operating phase obligations to the extent practicable.

Insurance: See Risk Allocation in PPP contracts in the Introduction.

Effective implementation of social and environmental management plan: See Environmental risk and Social risk.

Additional equity and other funding support: See Market Conditions in the Introduction.

Public Sector Risk Mitigation

Carrying out detailed feasibility and ground surveys: See PPP Project Preparation and Delivery in the Introduction. In addition, studies for hydro power projects should include identification and suitability of the site (considering all relevant factors including in particular, the geological and hydrological conditions and any land requirements for resettlement and biodiversity offset), additional land needs, interface with existing and future hydro power projects (including in particular if the project will be part of a cascade of projects and with other projects in the same watershed) and social and environmental impact of both the construction and operation of the hydro power project. Detailed ground surveys should also be carried out where practicable. Where such information is provided to bidders to rely on in pricing their bids, Contracting Authorities may elect to guarantee accuracy but not necessarily completeness or interpretation – this will depend on project-specific factors including the experience of the bidders and the ability to obtain other relevant information.

Running an efficient and fair procurement process: See PPP Project Preparation and Delivery in the Introduction. Enacting enabling legislation (if required) and complying with domestic procurement laws in relation to the project are primarily the Contracting Authority’s risk and responsibility. As the Private Partner will be affected by the consequences of breach of such legislation, it will carry out due diligence itself on these matters. Interference with the tender process and other issues attributable to the Private Partner will remain a Private Partner risk.

Timely consultation on social and environmental impact: It is key for the Contracting Authority to consider the effect of the project on people, wildlife and habitat and to implement effective management of stakeholder interests and public perception before and (in conjunction with the Private Partner) during the project. See Environmental risk and Social risk.

Having competent advisers: See Detailed Risk Identification and Analysis in the Introduction.
Timely involvement of internal stakeholders and contract management team: See Detailed Risk Identification and Analysis in the Introduction.

Careful assessment and quantification of risk: See Detailed Risk Identification and Analysis in the Introduction.

Taking performance security: The Contracting Authority may seek certain security directly from the Private Partner and its sub-contractors, or their parent companies, in respect of certain contractual (or tender) obligations. This may be in the form of bid bonds during the tender stage and, following the tender stage, completion bonds, performance bonds and guarantees. As an alternative, cash reserving mechanisms could be used during the life of the contract. The Contracting Authority will be able to call on this security in certain circumstances (such as performance failures by the Private Partner). Security has a cost attached which will feed through to pricing. Disproportionate security requirements will negatively affect value for money.

Public Sector Support Measures

The Contracting Authority/government may provide certain financial support to the project, in terms of subsidies or guarantees, although the consequences of such commitments and the potential liabilities for the public sector should be carefully considered, including how such support may dilute the risk/reward distribution under the PPP contract and affect value for money.

Where the Contracting Authority’s and/or the offtaker’s own credit is weak or uncertain, additional credit support may be sought by the Private Partner and its lenders in respect of the Contracting Authority’s contractual financial obligations. This may be the case, for example, in projects where the Contracting Authority is not part of central government or it is a local authority. To mitigate this Contracting Authority counterparty risk, a sovereign or central government (e.g. finance ministry) guarantee (or equivalent support) may be needed, though the full implication for the public sector should be carefully assessed, including the potential impact on the government’s contingent liabilities and fiscal sustainability. See Demand risk, Project Revenues, Including Payment Mechanisms above and Strength of Contracting Authority payment covenant under Early termination risk.
 


Key
Allocation of Risk
Circumstance Dependent Risk

Land Availability, Access and Site Risk Land Availability, Access and Site Risk

The risk associated with selecting land suitable for the project; providing it with good title and free of encumbrances; addressing indigenous rights; obtaining necessary planning approvals; providing access to the site; site security; and site and existing asset condition.

Risk Category and Description

PublicSharedPrivate

Provision of required land - general

Public Risk
Shared Risk
Public Risk
Shared Risk

[Public Risk]
The Contracting Authority typically bears the risk of selecting the site and acquiring the required land interests for the project, whether through compulsory acquisition/expropriation or other powers, because it has powers to do so which the Private Partner does not. It is also in the Contracting Authority’s interest because on expiry of the contract the asset will typically revert to public ownership and operation (and/or the contract will be subsequently re-tendered). The Contracting Authority is generally responsible for providing a “clean” accessible site, with no restrictive land title issues.

[Circumstance Dependent Risk]
During the feasibility stage (see PPP Project Preparation and Delivery in the Introduction), the Contracting Authority should undertake detailed assessments as regards ownership of the relevant land and ensure that it has a complete understanding of the risks involved in acquiring the site and those that will affect the construction and operation of the hydro power project. This includes consideration of matters such as rights of way, covenants affecting use or disposal and historic encroachment issues that may encumber the land, as well as how the Contracting Authority is addressing such issues and the extent to which bidders are required to price certain risks.

In addition, studies for hydro power projects should include identification and suitability of the site (considering all relevant factors including in particular, the geological and hydrological conditions and any land requirements for resettlement and biodiversity offset), additional land needs, interface with existing and future hydro power projects (including in particular if the project will be part of a cascade of projects and with other projects in the same watershed) and social and environmental impact of both the construction and operation of the hydro power project.

Such information should be disclosed to bidders as part of the bidding process. To the extent the Private Partner has relied on information provided and priced any such risks, it will share in those risks provided that the information relied on was accurate. Some Contracting Authorities will guarantee only correctness of data provided, not completeness or interpretation.

If the Contracting Authority needs to use its legislative powers to acquire the site (e.g. through compulsory acquisition/expropriation), this may increase social risk and other opposition to the project (e.g. due to delay caused by court cases). See also Social risk.

It is common for the site of the hydro power project to be determined by the Contracting Authority in order to maximise the energy yield, lower connection costs and reduce the risk of negative impact on the electricity network.

Market Comparison Summary

In certain markets, land rights (in particular reliable utilities records, and land charges and third party rights to (access) land) may be less clear than in other markets where established land registries and utility records exist and risks can be mitigated with appropriate due diligence. Where reliable information is not available, this will increase the risk of delay, cost increases and disputes. This makes it more likely that the Contracting Authority will need to bear the associated risk as the Private Partner will not be able to bear them.

The rights of private landowners against compulsory acquisition/ expropriation might be stronger in developed markets, so the Contracting Authority may need to allow more time to acquire the land.

In developed markets, even where the Private Partner may bear some land risk, the Contracting Authority will be responsible for securing the rights of way required for construction of new transmission lines by the project, but at the Private Partner’s cost.

In terms of payment for the land, in less developed markets (where the Contracting Authority may not have funds available to pay for the land), these payments may initially be passed through to the Private Partner as part of the project costs and reimbursed as part of the capacity payments or energy charge from the offtaker.

Timing of provision of required land

Public Risk
Public Risk

Acquisition pre-signature: The Contracting Authority should complete the process of land acquisition before the contract is awarded so that all issues and risks are known and managed. All relevant processes will need to be carried out in a timely manner. The timeframe will depend on the issues affecting the site and the applicable processes. The risk that all necessary processes have been satisfied will be the Contracting Authority’s risk. Consideration should be given to how land acquisition will be paid for by the Contracting Authority.

Acquisition post-signature: If the Contracting Authority is not able to provide the land by contract award, it will bear the risk of providing it in accordance with a contractually agreed programme. Failure to obtain the land by a certain date may entitle the Private Partner to terminate the contract (see also MAGA risk). If the risk of non-availability is too great, this may deter some investors and financiers from engaging in or continuing in the bid process.

Market Comparison Summary

In certain markets, land rights (in particular reliable utilities records, and land charges and third party rights to (access) land) may be less clear than in other markets where established land registries and utility records exist and risks can be mitigated with appropriate due diligence. Where reliable information is not available, this will increase the risk of delay, cost increases and disputes. This makes it more likely that the Contracting Authority will need to bear the associated risk as the Private Partner will not be able to bear them.

The rights of private landowners against compulsory acquisition/ expropriation might be stronger in developed markets, so the Contracting Authority may need to allow more time to acquire the land.

In developed markets, even where the Private Partner may bear some land risk, the Contracting Authority will be responsible for securing the rights of way required for construction of new transmission lines by the project, but at the Private Partner’s cost.

In terms of payment for the land, in less developed markets (where the Contracting Authority may not have funds available to pay for the land), these payments may initially be passed through to the Private Partner as part of the project costs and reimbursed as part of the capacity payments or energy charge from the offtaker.

Provision of permanent additional land

Public Risk
Private Risk
Public Risk, Private Risk

Identification pre-signature: [Public Risk]
If a permanent need for additional land is identified and agreed by the parties before contract signature then the associated risk is usually treated in the same way as the original land. Usually the Contracting Authority will bear the risk of acquiring/providing the additional land, unless the need for additional land is specific to a bidder (for example, due to a different design).

Identification post-signature: [Private Risk]
If a permanent need for additional land is only identified after contract signature then this will be a Private Partner risk as the need should have been identified and factored in to the Private Partner’s bid. The Contracting Authority may however find it needs to provide assistance with acquisition where the land is essential, with costs being borne by the Private Partner.

Market Comparison Summary

In certain markets, land rights (in particular reliable utilities records, and land charges and third party rights to (access) land) may be less clear than in other markets where established land registries and utility records exist and risks can be mitigated with appropriate due diligence. Where reliable information is not available, this will increase the risk of delay, cost increases and disputes. This makes it more likely that the Contracting Authority will need to bear the associated risk as the Private Partner will not be able to bear them.

The rights of private landowners against compulsory acquisition/ expropriation might be stronger in developed markets, so the Contracting Authority may need to allow more time to acquire the land.

In developed markets, even where the Private Partner may bear some land risk, the Contracting Authority will be responsible for securing the rights of way required for construction of new transmission lines by the project, but at the Private Partner’s cost.

In terms of payment for the land, in less developed markets (where the Contracting Authority may not have funds available to pay for the land), these payments may initially be passed through to the Private Partner as part of the project costs and reimbursed as part of the capacity payments or energy charge from the offtaker.

Provision of temporary additional land

Public Risk
Private Risk
Public Risk
Private Risk

Identification pre-signature: [Public risk]
Where temporary additional land needs (e.g. for materials or equipment storage during construction) are identified in the procurement phase and are common to all bidders, then the associated risk is usually treated in the same way as the original land. Usually the Contracting Authority will bear the risk of acquiring/providing such land, unless the need for such land is specific to a bidder (for example, due to its construction methods and equipment) – in which case the risk should be allocated to that bidder and the cost factored into its bid price.

[Circumstance Dependent Risk]
The Contracting Authority may however find it needs to provide assistance in some cases, with the cost being borne by the Private Partner.

Identification post-signature: [Private risk]
Where temporary additional land needs (e.g. for materials or equipment storage during construction) are identified, they should be a Private Partner risk as such need should have been identified and factored into the Private Partner’s bid. The Contracting Authority may however find it needs to provide assistance in some cases, with the cost being borne by the Private Partner.

Heritage / indigenous land rights

Public Risk
Private Risk
Public Risk
Private Risk

Land rights issues involving indigenous groups will be the responsibility of the Contracting Authority. The Private Partner will bear the risk of complying with legislation and contractual obligations imposed on it in this regard.

The Private Partner’s obligations with regard to indigenous rights is well legislated for in some markets. In the absence of legislation, indigenous land rights issues and community engagement can be managed by the Contracting Authority through the adoption of internationally recognised social and environmental standards and practices for the project (e.g. compatible with the Equator Principles). This will be particularly relevant if international financing options are being considered. 

See also Social risk.

Market Comparison Summary

This issue is coming under increasing focus from multilateral agencies and other finance parties, as well as   civil society and human rights organisations. For example, the World Bank’s commitment to sustainable development is set out in its Environmental and Social Framework which includes standards that both it and its borrowers must meet in projects it is to finance. Many finance parties (including commercial finance parties) adhere to the Equator Principles, committing to ensure the projects they finance (and advise on) are developed in a manner that is both socially responsible and reflects sound environmental management practices (as described in the Equator Principles).

Examples of specific legislation are native title legislation in Australia and the equivalent First Nations law in Canada. These include a requirement to seek consent from the indigenous parties affected and to enter into indigenous land use agreements.

Where legislation is insufficient, detailed environmental and social annexes may be appended to and form part of the concession agreement to be adhered to by the Private Partner.

Resettlement

Suitability of land

Public Risk
Shared Risk
Private Risk
Public Risk, Shared Risk
Private Risk

General: [Shared Risk]
The risk that the land is not suitable is typically shared as the Contracting Authority may be able to secure the availability of the site, but the suitability of the site may be dependent on the Private Partner’s design and construction plan. See also Design risk.

Underground: [Circumstance Dependent Risk]
See Site condition under Land availability, access and site risk.

Key planning consents

Shared Risk
Shared Risk

Pre-signature:
In most projects, there will be a benefit if planning consent for key permits and other key approvals can be obtained by the Contracting Authority before procurement although this is not always the case in hydro power projects where a number of key consents will be obtained by the Private Partner.

Post-signature:
If consents for key permits are not obtained before contract signature in hydro power projects it is typically the responsibility of the Private Partner to obtain the key consents after signature, subject to a compensation event occurring if the relevant government entity does not issue the key consents in a timely manner and through no fault of the Private Partner. See also Environmental risk and MAGA risk, Design risk and Environmental risk.

Market Comparison Summary

In some jurisdictions, it may not be possible to obtain the requisite planning consents until such time as the Private Partner has been identified and/or detailed design is known

Subsequent planning approvals

Public Risk
Private Risk
Private Risk
Public Risk

Obtaining subsequent detailed planning consent and other approvals will be a Private Partner risk. However, the Contracting Authority will share this risk to the extent the relevant authority does not act properly or within approval process deadlines – this may be treated as a compensation event. See also Environmental risk and MAGA risk.

Access to the site and associated infrastructure

Public Risk
Shared Risk
Public Risk
Shared Risk

Construction phase: [Circumstance Dependent Risk]

Operation phase: [Shared Risk]
As regards physical access to the site, the Contracting Authority’s risk and responsibility will typically be the same as described during the construction phase. If the Private Partner has been asked to construct new access routes which subsequently become public roads, the Contracting Authority may have obligations to maintain those routes. If such access routes are remotely located and continue to be necessary for the operation and maintenance of the hydro power project, the Private Partner might, as part of its operation phase obligations, have a responsibility to maintain such roads.

As regards access to the electrical transmission networks, the Contracting Authority should bear the risk of ensuring that electricity is distributed via the transmission and distribution network. Non provision of this access may be treated as a compensation or MAGA event. See also MAGA risk.

Market Comparison Summary

Third party rights to (access) land may not be easily identifiable in some jurisdictions, increasing risk of delay, cost increases and disputes. This makes it more likely that the Contracting Authority will need to bear the associated risks.

Site security

Public Risk
Private Risk
Public Risk, Private Risk

Construction phase/operation phase: Risk allocation with respect to site security will depend on the political climate, opposition to the project, nature of the risk and the stage of the project. Parties should aim to have a complete understanding of the risks involved in physically securing the site and those that will affect the construction and operation of the hydro power project.

Ordinarily the Private Partner will be responsible for day to day site security. However, the Contracting Authority may need to use statutory means to properly secure the site for the Private Partner (such as military/police involvement or eviction) and in some circumstances may be required to continue to provide additional site security / assistance during construction and operations to manage this risk. By way of example, for remotely located projects with limited access options, it may be possible for small protests to significantly impact the progress of construction. Failure may be treated as a compensation or MAGA event. See also Force majeure risk, MAGA risk, Social risk and Vandalism under Construction risk and Operating risk.

Market Comparison Summary

For example, where there is public opposition to the hydro power project, there may be protestor action, or there may be issues safeguarding the equipment and installation.

In some countries, remote hydro power projects may be located in (or close to) conflict zones and detailed consideration will need to be given to decide whether a project can be sufficiently safeguarded in such locations to proceed.

Utilities and installations

Public Risk
Private Risk
Private Risk
Public Risk

Costs or delays caused by relocation of /access to utilities: To the extent reliable data is available and shared during the tender process, the Private Partner can bear and price the corresponding risk of any costs or delays caused by statutory undertakers and utility providers in carrying out diversions or connections. Costs and delays caused by re-location of existing utilities or access to utilities for the purposes of the project which are due to the Private Partner’s design or construction plan are usually allocated to the Private Partner. To the extent that a new hydro power project is in a remote location, it is typical for required utilities to be imported, transported to the site or built by the Private Partner. This would be priced into the project costs and there would be no specific pass through to the Contracting Authority in connection with the same. For connections to existing infrastructure, see also Project management and interface with other works/facilities under Construction risk.

Market Comparison Summary

In some markets or challenging locations, there may be little data on location of utilities (water, sewage, oil, gas, optical fibre etc.) and the Private Partner may be unable to accept all or part of this risk.

Site condition

Public Risk
Shared Risk
Private Risk
Public Risk
Shared Risk, Private Risk

Surveyed: [Shared Risk]
The Contracting Authority usually undertakes detailed hydrological, climate, geotechnical and ground/soil surveys during the feasibility stage (if not already publicly available) and discloses such information as part of the bidding process. Sharing the surveys will save bidders’ costs (all which would otherwise feed through to the Contacting Authority in the contract price). In the case of hydrological and climate data, long term historical data will be required for bidders to properly model the project’s potential capacity. To the extent reliable data is available and shared during the tender process, the Private Partner can bear and price the corresponding risk of such conditions causing cost and delay.

The Contracting Authority will bear risk to the extent data provided by it and relied upon by the Private Partner in its bid proves inaccurate. Some Contracting Authorities will guarantee only accuracy, not completeness or interpretation of the data.

As mentioned above, the reliability of the water supply will be assessed by reference to historical records which should have been maintained over a long period of years by the host country. If detailed and accurate records exist a Private Partner may accept some hydrology risk. However, in many cases, data of this nature has not been collected or maintained for a sufficient period of time. See also Operational resources or input risk under Operating risk. Where this is the case the Contracting Authority should consider installing appropriate metering stations at the outset of conducting its feasibility studies. Given the long development period that is characteristic for hydro power projects, this could provide the parties with useful data before key project agreements (such as a long term power purchase agreement) are signed.

The parties should also assess the possibility of current or future activities upstream impacting the hydrological conditions (e.g. third parties diverting water away from the river for other purposes).  To the extent that the Private Partner will generally not be in a position to restrict such activities, this will need to be a Contracting Authority risk.

MARKET COMPARISON SUMMARY

In a mature market, the Contracting Authority normally hands over the site to the Private Partner in an “as-is” condition on the basis of the surveys provided. The Private Partner can rely on the surveys but otherwise bears the risk.

In some markets, the bidders carry out the surveys during the tender process – this may be the best solution in some circumstances, but may also limit competition unless bidders are compensated for these costs.

Unsurveyed: [Circumstance Dependent Risk]
Where it is not possible to fully survey site condition prior to award (e.g. in heavily treed, remote mountainous areas), the risk for unsurveyable land will be allocated to the Contracting Authority (e.g. as a compensation event). The risk may be shared by the Private Partner (e.g. as a relief event) in some circumstances, for example where the risks were within the knowledge of the Private Partner when it priced its bid or an experienced contractor would have considered their existence as being possible. The impact on the project and the cost of remediation works for certain existing site conditions can be significant so the ultimate risk allocation will depend on the project specifics.

Cultural / Archaeological finds: [Circumstance Dependent Risk]
Discovery of artefacts can cause delays and costs as there may be legal or other requirements in relation to reporting them and permitting archaeological study. The risk allocation will depend on the nature of the project, the extent to which the risk was known to and priced by the Private Partner, the reliability of data provided by the Contracting Authority and whether the project location is considered high risk. One approach is to share the risk such that the Private Partner bears the risk in respect of designated areas (such as a low risk area) and the Contracting Authority bears the risk outside such areas (such as a high risk area). Another approach is for the Private Partner to be obliged to notify and suspend work if a discovery is made and possibly also coordinate work, but for the Contracting Authority to appoint specialised contractors and to bear cost/delay and interface risk.

MARKET COMPARISON SUMMARY

In markets where reasonable surveys/assessment can be made and the risk priced, discovery of finds is often treated as a relief event.

Unexploded bombs, land mines and other munitions: [Circumstance Dependent Risk]
Discovery of munitions can cause delays and costs as they will need to be defused and removed. The risk allocation will depend on the nature of the project, the extent to which the risk was known to and priced by the Private Partner, the reliability of data provided by the Contracting Authority and whether the project location is considered high risk.

MARKET COMPARISON SUMMARY

In markets where reasonable surveys/assessment can be made and the risk priced, discovery of munitions risk is often treated as a relief event. In some countries, the risk of unexploded land mines can be high and specific surveying and cost provisions may need to be agreed.

Pre-existing environmental pollution: [Circumstance Dependent Risk]
Pre-existing pollution is typically the Contracting Authority’s risk except to the extent it was known to and priced by the Private Partner. Remediation works for certain existing environmental conditions can be expensive so the ultimate risk allocation will depend on the project specifics and the surveys provided to the Private Partner.

See also Environmental risk and Change in law risk.

Existing asset condition

Public Risk
Private Risk
Private Risk
Public Risk

Where there are existing assets proposed to be used in the project (e.g. reservoirs), where practical they should be fully surveyed (and potentially warranted) by the Contracting Authority. To the extent reliable data relating to the condition of existing assets is shared by the Contracting Authority during the tender process and can be relied upon during implementation, the Private Partner can price the risk of using them, including the interface with other aspects of the project and latent defect risks. The Private Partner will then bear the corresponding risk. The Contracting Authority will bear risk to the extent such data proves inaccurate or insufficient, and to the extent of any warranties it provides. Some Contracting Authorities will guarantee only accuracy, not completeness or interpretation.

If latent defects are discovered in assets which are due to be replaced at some point in the life of the contract, the Contracting Authority may be able to mitigate its risk to some extent by having a contractual mechanism which brings forward the replacement date. See also Suitability of design under Design risk, Project management and interface with other works/facilities under Construction risk and Maintenance standards under Operating risk.


Key
Allocation of Risk
Circumstance Dependent Risk

Social Risk Social Risk

The risk associated with the project impact on adjacent properties and affected people (including public protest and unrest); resettlement; indigenous land rights; and industrial action.

Risk Category and Description

PublicSharedPrivate

Community and businesses

Public Risk
Shared Risk
Private Risk
Public Risk, Shared Risk
Private Risk

Resettlement

Public Risk
Private Risk
Public Risk
Private Risk

Heritage / indigenous people

Public Risk
Private Risk
Public Risk
Private Risk

Industrial action

Public Risk
Shared Risk
Private Risk
Public Risk, Shared Risk, Private Risk
Key
Allocation of Risk
Circumstance Dependent Risk

Environmental Risk Environmental Risk

The risk associated with pre-existing conditions; obtaining consents; compliance with laws; conditions caused by the project; external events; and climate change.

Risk Category and Description

PublicSharedPrivate

Obtaining environmental consents

Public Risk
Private Risk
Private Risk
Public Risk

Compliance with environmental consents and laws

Private Risk
Private Risk

Environmental conditions caused by the project

Private Risk
Private Risk

External environmental events

Public Risk
Shared Risk
Public Risk, Shared Risk

Climate change event

Public Risk
Shared Risk
Shared Risk
Public Risk
Key
Allocation of Risk
Circumstance Dependent Risk

Design Risk Design Risk

The risk that the project design is not suitable for the purpose required; approval of design; and changes.

Risk Category and Description

PublicSharedPrivate

Suitability of design

Public Risk
Private Risk
Private Risk
Public Risk

Approval of designs

Public Risk
Private Risk
Private Risk
Public Risk

Changes to design

Public Risk
Private Risk
Public Risk, Private Risk
Key
Allocation of Risk
Circumstance Dependent Risk

Construction Risk Construction Risk

The risk of construction costs exceeding modelled costs; completion delays; project management; interface; quality standards compliance; health and safety; defects; intellectual property rights compliance; industrial action; and vandalism.

Risk Category and Description

PublicSharedPrivate

Cost increases

Public Risk
Shared Risk
Private Risk
Private Risk
Public Risk, Shared Risk

Works completion delays

Public Risk
Shared Risk
Private Risk
Private Risk
Public Risk, Shared Risk

Project management and interface with other works/facilities

Public Risk
Private Risk
Private Risk
Public Risk

Quality assurance and other construction regulatory standards

Shared Risk
Shared Risk

Health and safety compliance

Private Risk
Private Risk

Liability for death, personal injury, property damage and third party liability

Private Risk
Private Risk

Defects and defective materials

Private Risk
Private Risk

Intellectual property

Public Risk
Private Risk
Private Risk
Public Risk

Industrial action

Vandalism

Shared Risk
Private Risk
Private Risk
Shared Risk
Key
Allocation of Risk
Circumstance Dependent Risk

Variations Risk Variations Risk

The risk of changes requested by either party to the service which affect construction or operation.

Risk Category and Description

PublicSharedPrivate

Variations Risk

Public Risk
Shared Risk
Private Risk
Public Risk, Private Risk
Shared Risk
Key
Allocation of Risk
Circumstance Dependent Risk

Operating Risk Operating Risk

The risk of events affecting performance or increasing costs beyond modelled costs; performance standards and price; availability of resources; intellectual property rights compliance; health and safety; compliance with maintenance standards; industrial action; and vandalism.

Risk Category and Description

PublicSharedPrivate

Increased operating costs and affected performance

Public Risk
Shared Risk
Private Risk
Private Risk
Public Risk, Shared Risk

Performance/ price risk

Private Risk
Private Risk

Operational resources or input risk

Shared Risk
Shared Risk

Intellectual property

Public Risk
Private Risk
Private Risk
Public Risk

Health and safety compliance

Public Risk
Private Risk
Private Risk
Public Risk

Liability for death, personal injury, property damage and third party liability

Public Risk
Private Risk
Private Risk
Public Risk

Maintenance standards

Public Risk
Private Risk
Private Risk
Public Risk

Industrial action

Vandalism

Key
Allocation of Risk
Circumstance Dependent Risk

Demand Risk Demand Risk

The risk of user levels being different to forecast levels; the consequences for revenue and costs; and government support measures.

Risk Category and Description

PublicSharedPrivate

General principles

Key
Allocation of Risk
Circumstance Dependent Risk

Financial Markets Risk Financial Markets Risk

The risk of inflation; exchange rate fluctuation; interest rate fluctuation; unavailability of insurance; and refinancing.

Risk Category and Description

PublicSharedPrivate

Inflation

Public Risk
Private Risk
Private Risk
Public Risk

Exchange rate fluctuation

Public Risk
Shared Risk
Private Risk
Private Risk
Public Risk, Shared Risk

Interest rate fluctuation

Public Risk
Shared Risk
Private Risk
Private Risk
Public Risk, Shared Risk

Unavailability of insurance

Public Risk
Shared Risk
Private Risk
Shared Risk
Public Risk, Private Risk

Refinancing

Shared Risk
Private Risk
Shared Risk
Private Risk
Key
Allocation of Risk
Circumstance Dependent Risk

Strategic/ Partnering Risk Strategic/ Partnering Risk

The risk of the Private Partner and/or its sub-contractors not being the right choice to deliver the project; Contracting Authority intervention in the project; ownership changes; and disputes.

Risk Category and Description

PublicSharedPrivate

Private Partner failure/insolvency

Private Risk
Private Risk

Sub-Contractor failure/insolvency

Private Risk
Private Risk

Change in Private Partner ownership

Private Risk
Private Risk

Permitted Contracting Authority step-in

Public Risk
Private Risk
Public Risk, Private Risk

Change in Contracting Authority ownership/status

Public Risk
Public Risk

Disputes

Shared Risk
Private Risk
Shared Risk, Private Risk
Key
Allocation of Risk
Circumstance Dependent Risk

Disruptive Technology Risk Disruptive Technology Risk

Not applicable in hydro power projects where demand risk is with the Contracting Authority.

Risk Category and Description

PublicSharedPrivate

Disruptive Technology Risk

Key
Allocation of Risk
Circumstance Dependent Risk

Force Majeure Risk Force Majeure Risk

The risk that unexpected events occur that are beyond the control of the parties and delay or prevent performance.

Risk Category and Description

PublicSharedPrivate

Force majeure events

Public Risk
Shared Risk
Public Risk, Shared Risk

Force majeure consequences

Shared Risk
Shared Risk
Key
Allocation of Risk
Circumstance Dependent Risk

MAGA Risk MAGA Risk

The risk of actions within the public sector’s responsibility having an adverse effect on the project or the Private Partner.

Risk Category and Description

PublicSharedPrivate

Material Adverse Government Action Risk (MAGA)

Public Risk
Public Risk
Key
Allocation of Risk
Circumstance Dependent Risk

Change In Law Risk Change In Law Risk

The risk of compliance with applicable law; and changes in law affecting performance of the project or the Private Partner’s costs.

Risk Category and Description

PublicSharedPrivate

Compliance with applicable law

Public Risk
Private Risk
Public Risk
Private Risk

Change in law (and taxation)

Public Risk
Shared Risk
Public Risk
Shared Risk
Key
Allocation of Risk
Circumstance Dependent Risk

Early Termination Risk Early Termination Risk

The risk of a project being terminated before its natural expiry on various grounds; the financial consequences of such termination; and the strength of the Contracting Authority’s payment covenant.

Risk Category and Description

PublicSharedPrivate

Contractual termination provisions

Shared Risk
Shared Risk

Contracting Authority default termination

Public Risk
Public Risk

MAGA / Change in law termination

Public Risk
Public Risk

Voluntary Termination by Contracting Authority

Public Risk
Public Risk

Force Majeure and Uninsurability termination

Shared Risk
Shared Risk

Private Partner default termination

Private Risk
Private Risk

Strength of Contracting Authority payment covenant

Public Risk
Private Risk
Public Risk
Private Risk
Key
Allocation of Risk
Circumstance Dependent Risk

Condition At Handback Risk Condition At Handback Risk

The risk of deterioration of the project assets/land during the life of the PPP and the risk that the project assets/land are not in the contractually required condition at the time of handback to the Contracting Authority.

Risk Category and Description

PublicSharedPrivate

Condition At Handback Risk

Private Risk
Private Risk