Transport

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 heavy rail 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 heavy rail 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 heavy rail 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

  • Site and existing asset condition risk: Site condition and suitability risk and existing asset risk will be borne by the Private Partner to the extent satisfactory and accurate surveys can be undertaken. This is particularly acute in relation to rehabilitation projects and the Contracting Authority may have to retain certain maintenance and interface risks. See Land acquisition, access and site risk, Suitability of design under Design risk, Project management and interface with other works/facilities under Construction risk and Maintenance standards under Operating risk.

  • Availability risk: The risk of the rail network (and, if applicable, rolling stock) being available for use in accordance with the required metrics will be borne by the Private Partner, although there may be shared elements in relation to, for example, third party damage to the network. See Operating Risk.

  • Demand/revenue risk, if user payment: Demand (i.e. farebox) risk on a user pays project will be borne in some part by the Private Partner on the basis of the Private Partner’s demand projections, although (as described above) typically the Contracting Authority may need to provide minimum revenue or usage guarantees. Such support is likely to be appropriate particularly where the Private Partner is not in control of the number of services to be provided  and the level of demand is uncertain. Acceptance of demand risk will also influenced by how fares are set, i.e. the extent to which the Private Partner is free to set prices.  In a rehabilitation project, past traffic studies will typically be available and may be indicative in assessing traffic forecast and better calibrating public sector financial support. There may also be compensatory mechanisms if higher usage than forecast gives rise to increased maintenance costs. See Demand risk.

  • Environmental/social risk: The Private Partner will bear the risk of obtaining and complying with environmental consents in connection with rehabilitating and operating the project, but there will be an element of shared risk in relation to changes in approach from permitting authorities and external environmental events.  As regards social risk, the Contracting Authority will bear the risk of the impact of its transport policies on the local community and businesses, but the Private Partner will bear the risk of failing to implement contractually agreed social management measures and there will be shared elements in relation to, for example, industrial action. See Environmental risk and Social risk.

  • Maintenance standards: Compliance with maintenance standards for the network (and, if applicable the rolling stock) is a key risk for the Private Partner. See Maintenance standards under Operating risk.

  • Completion (including delay and increased cost) risk: The risk of successfully completing a heavy rail rehabilitation project will primarily sit with the Private Partner. This is a key risk for the Private Partner, given the complex nature of the commissioning/completion processes, especially in difficult terrain and where tunnelling and bridges are part of the design, or where rolling stock is also being procured. See Works completion risk under Construction risk.

  • Interface risk: There are significant operational and technical interface issues in relation to the various elements of a heavy rail network (e.g. superstructure, substructure, stations, communications/signalling, rolling stock and operations). This will be the Private Partner’s risk to the extent these elements fall within the contract scope, but otherwise will typically be the Contracting Authority’s risk, together with certain interface risk in relation to other connecting works/services. See Project management and interface with other works/facilities under Construction risk and Interface under Operating risk.

Type of Project and Scope Considerations

This matrix addresses the common risks for the rehabilitation, finance, operation, maintenance, transfer (at the end of the PPP contract) of a PPP intercity passenger rail project (including the track infrastructure and rail service).

There are many procurement permutations in the heavy rail sector. It is unusual to see the track infrastructure (superstructure, substructure, stations and communications/signalling) procured in the same transaction as rolling stock, but for completeness, this matrix includes certain considerations relating to rolling stock. See Market Approaches below.

The scope and elements of the project will depend on the extent of the rehabilitation required.

Assumptions

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

The rail assets are handed back to the Contracting Authority on early termination or natural expiry of the contract, together with all consents and licences (including intellectual property licences) necessary to continue operating the railway, in accordance with the contractual handback requirements.

Market Approaches

As mentioned above, there are a variety of procurement permutations for heavy rail projects, particularly related to scope, and there are commercial, political and legal reasons for choosing different approaches. The classic PPP model (transferring full responsibility for the construction and operation of the whole project to a single Private Partner and minimising interface issues) can be difficult to achieve in the heavy rail sector for a new build project and similar considerations are relevant to rehabilitation projects. Challenges include the ability to deliver a single turnkey construction solution due to the overall size of the project, a restricted choice of technical solutions based on the make-up of the winning consortium rather than the best combination for the Contracting Authority (e.g. a different signal provider might fit better with existing systems), and a potential lack of flexibility if operational changes are required (e.g. the operator may not be able to accommodate timetable changes needed by the Contracting Authority without compensation being paid , whereas this may be more achievable if a shorter term operating contract is separately procured periodically). There may also be political factors, such as the government wanting certain elements of the service to remain within public sector provision. An alternative is a “layering approach”, whereby one or more elements of the project are procured separately (i.e. infrastructure, rolling stock or operations) and the contracts may have differing contract lengths. The layering approach typically places interface risk on the Contracting Authority and a robust dispute resolution mechanism is essential to resolve issues between the various parties.

Regulation of the rail sector varies between countries and the contractual scheme in the rail sector may be determined by applicable national or supra-national law as regards separation of (potentially monopolistic) services. Within the EU, for example, it is common for the track infrastructure to be delivered by a different operator (an infrastructure network owner) to the rolling stock and rail service provider (a train operator, who may be a public sector entity or a private concessionaire or partner). In that type of contractual scheme, the train operator(s) will charge the end users, which will form the substance of its revenues. The train operator will in turn pay the infrastructure network owner a track access charge under a track access charge contract, typically based on track usage by reference to rolling stock type, miles travelled and traction electricity, and these charges will form the basis of the infrastructure network operator’s project revenues.

PPP projects in the heavy rail sector are less common than in the light rail sector. Demand (i.e. farebox) risk projects have been procured but these have met with varied degrees of success. See Demand risk.

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

In the rail sector, new infrastructure requires considerable capital expenditure and will not typically be capable of generating the required revenue through users to be viable without some form of government subsidy, such as upfront subsidy towards capital expenditure (i.e. construction costs) typically payable on construction completion or completion of certain construction milestones, and/or a minimum revenue/usage guarantee in the operating period. Whether this is required on a rehabilitation project will depend on the level and cost of rehabilitation works required.

For a heavy rail project, project revenues are typically generated either through availability payments by the Contracting Authority or a combination of availability payments and user ticket sales (which will involve an element of demand risk being borne by the Private Partner based on passenger or train numbers). Ticket revenues will depend on passenger throughput, fare pricing and enforcement of fare payment. The Private Partner’s ability to set pricing under the applicable regulatory regime (or the contract, as applicable) will be a key factor in allocating farebox risk.

All rail projects have a certain degree of exposure to demand risk as demand impacts maintenance and replacement costs. Variable usage (e.g. in terms of passenger or carriage numbers) is a key factor in heavy rail projects. Whatever the model selected, the parties will need to consider how to address variable usage in the contract in a fair and transparent manner, taking into account the cost/revenue impact and any underlying cause. The same applies where there is scope within the rail timetable for changes to forecast usage in terms of the number and distance of services provided. In an availability payment model the approach will be linked to how “availability” is defined and the payment mechanism may, for example, be structured so that it takes into account incremental costs (and revenues) by reference to elements such as train mileage, wear and tear, electricity needs and driver/staffing costs. Variable usage levels in respect of rolling stock are typically addressed through the payment mechanism by reference to mileage bands, reflecting the increased or decreased mileage worked by the relevant rolling stock. Contractual mechanisms should take into account both higher and lower usage than forecast, although any scaling down of costs is likely to be subject to the need to ensure that the network (and, as applicable, the rolling stock) remain functioning, even if they are not in use to the extent forecast. Deductions or penalties are typically applied to availability payments where the Private Partner has not met contractual availability and performance standard criteria. Opportunities for additional third party revenue streams through station and other trackside facilities (to the extent these are permitted) should also be assessed and addressed under the contract.

See Performance/price risk under Operating risk and Demand risk.

Other Considerations

Staged operation commencement: The Contracting Authority may wish to implement a multi-staged operation commencement process enabling the Private Partner to begin to receive payment once significant components of the project are substantially completed. This can help increase cash flow during the overall construction/rehabilitation process, reduce the Private Partner’s financing costs and incentivize the phasing of construction/rehabilitation works in order to ensure critical components are completed on time. On the other hand, staged completion dates may also increase the complexity of the construction/rehabilitation programme, limit the Private Partner’s ability to mitigate construction/rehabilitation delays and/or have agreed damages attached to them, which can increase the risk to the Private Partner. This is likely only to be suitable where distinct sections of the network can become operational in phases (including where compatible rolling stock is available) and where commencement of operation will not distract from ongoing construction/rehabilitation requirements. 

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/rehabilitation, the Private Partner will often enter into a lump sum construction contract with a construction sub-contractor 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-contractor will be entitled under the sub-contract). The Private Partner will bear the risk of liability caps agreed under the sub-contract being reached or warranty periods under the sub-contract 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 new and rehabilitation heavy rail projects should include (as applicable) identification and suitability of corridor, additional land needs, interface with existing and future transport networks (and corresponding impact on the project), usage forecasts and social and environmental impact of both the construction/rehabilitation and operation of the heavy rail network. Where the project involves rehabilitation and upgrade of existing rail assets, this is key to provide a baseline position for bidders. 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 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 (e.g. effectively take back much of any demand risk purportedly transferred) and affect value for money.

Where the Contracting Authority’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]
As with a new heavy rail PPP project, on a rehabilitation PPP project, the Contracting Authority typically bears the risk of selecting the corridor (where applicable) and acquiring/expropriation any additional required land interests for the project, whether through compulsory acquisition 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). In a rehabilitation project, whether the railway was procured originally by PPP or otherwise, the Contracting Authority is generally responsible for providing a “clean” accessible site, with no restrictive land title issues. This can be a key risk in rail projects due to the length and nature of the railway, particularly if the Contracting Authority has not fully addressed certain land rights issues even though the railway is in existence. See also Access to the site and associated infrastructure under Land availability, access and site risk.

[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/rehabilitation and operation of the railway. Such information should be disclosed to bidders as part of the bidding process. 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. 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.

The Contracting Authority bears the principal risk as the Private Partner is acquiring an interest in an existing railway.

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 escalation 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.

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.

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 escalation 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.

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]
Identification post-signature: 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 escalation 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.

Provision of temporary additional land

Public Risk
Private Risk
Public Risk
Private Risk

Identification pre-signature: [Circumstance Dependent 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.

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/rehabilitation) 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 desirable. 

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.

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 corridor, but the suitability of the corridor may be dependent on the Private Partner’s design and construction/rehabilitation plan (such as catenary location for overhead power as opposed to diesel/hybrid or third rail solutions). See also Design risk.

Underground: [Circumstance Dependent Risk]
Risk with regard to stability and suitability of the underground sits with the Contracting Authority if no or unreliable data is available and the risk cannot be transferred (or transferring the risk does not represent value for money). To the extent reliable data is available in the tender phase and can be relied upon by the Private Partner, the risk sits with the Private Partner. See also Site condition under Land availability, access and site 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.

Key planning consents

Public Risk
Private Risk
Public Risk
Private Risk

Pre-signature: [Public Risk]
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 – these may include key environmental consents.

Post-signature: [Circumstance Dependent Risk]
If consents for key permits are not obtained before contract signature and the Contracting Authority wants to sign the contract, it will typically bear the risk of the consents being delayed or not obtained (subject to the Private Partner complying with any reasonable requirements) – this may be treated as a compensation event. Failure by the Contracting Authority to obtain the consents by a certain date is likely to entitle the Private Partner to terminate the contract. Permit risk may be complicated further if there are different levels of authorities involved, and interaction between levels of design and authorisations may impact the timeline.  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. See also 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
Public Risk

The Contracting Authority will typically be required to grant the Private Partner all land rights it requires to implement the project. The Private Partner will be responsible for assessing the adequacy of the land rights granted (including any associated easements and access rights in relation to third party land). The Contracting Authority will then be responsible for ensuring the Private Party has these rights, whether by way of legislation/statutory powers or through contract. If the risk of non-availability of land access is too great, this may deter some investors and financiers from engaging in or continuing in the bid process.

Construction/rehabilitation phase:  In principle the Contracting Authority will be responsible for ensuring the Private Partner can access the site during construction/rehabilitation (including for example closing adjacent heavy rail lines or roads to enable construction/rehabilitation to take place over them). Either (i) it will pay the costs of providing access itself, or (ii) the Private Partner will pay such costs and be reimbursed through the contract price (or permitted ticket price) to the extent it has priced such costs into its bid.  This will depend on the nature of the access required.  Failure to provide access may be treated as a compensation event. See also MAGA risk.

The parties will need to agree the extent to which the Private Partner may bear some responsibility for the impact on access routes of heavy loads.

Operation phase:  The Contracting Authority should bear the risk of ensuring that users can access the new rail line via the existing transport network. In a heavy rail project where the Private Partner payment is based at least in part on usage volume this will be a key Contracting Authority risk. This may be treated as a compensation or MAGA event. See also Demand risk and MAGA risk.

Market Comparison Summary

Third party rights to (access) land may not be easily identifiable in some jurisdictions, increasing risk of delay, cost escalation 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/rehabilitation 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/rehabilitation and operation of the heavy rail network.

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 police involvement or eviction) and in some circumstances may be required to provide additional site security / assistance during operations to manage this risk. Failure may be treated as a compensation or MAGA event. See also Force majeure risk, MAGA risk, Social risk, Vandalism under Construction risk and Vandalism and Interface under Operating risk.

Market Comparison Summary

For example, where there is public opposition to the heavy rail network, there may be protestor action, or there may be issues safeguarding the equipment and installation.

Utilities and installations

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

Costs or delays caused by relocation of /access to utilities: [Private Risk]
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/rehabilitation plan are usually allocated to the Private Partner. For connections to existing infrastructure, see also Project management and interface with other works/facilities under Construction risk.

[Circumstance Dependent Risk]
The Contracting Authority will bear risk if no reliable information is available. It will also bear risk to the extent data provided by it and relied upon by the Private Partner in its bid proves inaccurate.

Lack of data on existing utilities location can make it difficult for the Private Partner to assess (and price) the cost and time needed for relocation which can impact on the construction/rehabilitation timetable and ultimately on meeting the operation commencement date. If the Private Partner bears this risk, the Contracting Authority may need to share the risk by capping the Private Partner’s liability or by having a cost sharing mechanism.     

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.

Costs or delays caused by utility provider: [Circumstance Dependent Risk]
Costs and delays caused by a utility provider could arise in both phases and the risk will be allocated according to the relevant circumstances and market and ownership of the utility. The risk could be shared or allocated to the Contracting Authority.

MARKET COMPARISON SUMMARY

In markets where the utility provider is a private entity, this risk is likely to be treated as a relief event (and the utility company will bear the risk) - this is common in mature markets. In less mature markets, particularly where the utility provider is a state-owned entity, the risk is likely to be allocated to the Contracting Authority as a compensation or MAGA event.

Site condition

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

Surveyed: [Circumstance Dependent Risk]
The Contracting Authority usually undertakes detailed 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). 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.

Where projects involve large elements of tunnelling, geotechnical risks will be more carefully assessed by the Private Partner as these will be key risks. See also Construction 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 high density urban areas), the risk for unsurveyable land will be allocated to the Contracting Authority (e.g. as a compensation event) (See also Existing asset condition). 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.

MARKET COMPARISON SUMMARY

In some markets there may be less historic data available to the parties to assess risk. It may however be easier to perform comprehensive surveys in a less urban area.

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 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 site 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

As there are highly likely to be existing assets proposed to be used in a rehabilitation project, these should be fully surveyed (and potentially warranted) by the Contracting Authority. In the context of a rehabilitation/upgrade project, these surveys are critical to the robustness of bids. 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, although it is likely that some risk may have to be retained by Contracting Authorities where it is not possible to conduct comprehensive surveys of complex existing assets.

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
Private Risk
Public 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

Public Risk
Private Risk
Private Risk
Public 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/rehabilitation 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/rehabilitation 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
Private Risk
Shared Risk, Private 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
Shared Risk
Private Risk
Private Risk
Public Risk, Shared Risk

Interface

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

Industrial action

Vandalism

Shared Risk
Private Risk
Private Risk
Shared Risk
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

Considerations

Public Risk
Public Risk

Higher demand than anticipated

Shared Risk
Private Risk
Private Risk
Shared Risk

Lower demand than anticipated

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

Government support measures

Shared Risk
Shared Risk
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

The risk that a new emerging technology unexpectedly displaces an established technology or the risk of obsolescence of equipment or materials used.

Risk Category and Description

PublicSharedPrivate

Disruptive Technology Risk

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