Water & Waste

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 water distribution 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 water distribution 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 water distribution 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

  • Existing system condition: The condition of the system to be rehabilitated may be challenging for the Private Partner to fully assess and price and so the Contracting Authority may have to retain some risks related to unforeseen circumstances. Similarly, the condition of the existing assets may be so poor that the Contracting Authority needs to bear some risk as regards rehabilitation/maintenance. See Existing asset condition under Land availability, access and site risk, Construction risk and Operating risk

  • Environmental/social risk: The impact of rehabilitating the water distribution system on local habitat, (social) infrastructure and communities generally, as well as on adjacent properties and industries, must be carefully assessed and managed by the parties. Contamination of a water distribution system will affect the morbidity and mortality rates of users, and increases to water bills may cause social unrest so operational and social risks are closely related. The involvement of the private sector in water distribution/delivery can be perceived negatively by the public, increasing the risk of opposition to the project. See Environmental risk and Social risk.

  • Completion/operation commencement risk: Completion of rehabilitation works on time and on budget will be a particular challenge for the Private Partner in difficult underground terrain and if unanticipated asset condition issues emerge. This will increase the Private Partner’s costs and adversely affect its revenues with a knock-on effect on its on-going works programme and availability of the network. Staged completion dates are likely in a rehabilitation water distribution project, as further described below. See Staged operation commencement and Cost increases and Works completion delays under Construction risk.

  • Access to site: Obtaining access to relevant parts of the distribution network to carry out rehabilitation works may be difficult and costly depending where it is located – for example, if it is under or crosses other infrastructure (such as a road or other utility pipes) or under or across private property. See Access to the site and associated infrastructure under Land availability, access and site risk.

  • Tariff setting: Tariff formulae can be complex and different interpretations of the formulae can lead to costly and lengthy disputes and result in the Private Partner not generating the revenues it anticipated. Clear objective criteria can mitigate this risk. See Projects Revenues, including Payment Mechanisms and Concession model under Demand risk

  • Revenue collection: In the concession model, the Private Partner bears the primary risk of collecting water payments. Enforcing payment can be difficult depending on user demographic and expectation, as well as political will to support enforcement, and this can be exacerbated by unpopular tariff increases. New or enhanced systems for measuring delivery/usage and billing may also take time to implement. See Environmental risk and Social risk and Demand risk.

  • Water supply: Raw water supply can be a significant risk in some jurisdictions due to unpredictable weather patterns, droughts and inadequate water supply infrastructure. See Climate change event under Environmental risk and Operational resources or input risk under Operating risk.

Type of Project and Scope Considerations

This matrix addresses the common risks for the rehabilitation, finance, operation, maintenance and re-transfer to the Contracting Authority (at the end of the PPP contract) of an existing water distribution system (and, subject to the project model, delivering water to end users and collecting associated water tariff payments).

Scope may include associated infrastructure, such as pump stations and connections to water treatment and supply facilities. Water tariffs are payable by end users, and the Contracting Authority will sometimes include a requirement to set up and/or manage the water tariff collection system.

A pure distribution project may be structured on an availability-based model (e.g. on a point to point basis excluding delivery to end users). However, if the Contracting Authority wants the Private Partner also to be responsible for delivery of water to third party users and collection of associated water tariff payments (and for project revenues to be generated primarily through such tariff revenues), the project will typically be structured as a concession model. The concession model may be the more appropriate choice for a Contracting Authority to achieve desired improvements in the water network. This is because water projects typically require substantial capital investment and the scale of rehabilitation required may only emerge over time if most of the assets are underground. Fixing pricing upfront on an availability basis may be difficult when it is hard to assess existing asset condition underground, whereas operating as a whole business may give the Private Partner the flexibility and incentive needed to invest in maintaining the capital assets and improving revenue collection (which can be a challenge for Contracting Authorities in some jurisdictions if, for example, users are accustomed to water being free or collection not being enforced).

To the extent there is no existing infrastructure in place, the scope of a new project would include design and build elements – for this purpose the matrix includes certain construction-related aspects (for example, in relation to land).

Assumptions

The Private Partner finances the development of the rehabilitated water distribution system and only starts to receive payment (from the Contracting Authority or users, according to the project model) once the water distribution system is in operation.

The Contracting Authority owns and operates the existing water distribution network which is being rehabilitated (or in which the rehabilitated distribution system is integrated) and is the sole supplier of water into the distribution network.

Under a concession model, the Private Partner is also responsible for delivering water to end users and collecting associated water tariff payments (and the tariff is set under the concession contract).

Under an availability model, the Contracting Authority either takes re-delivery of the water once it has been transported through the network or arranges for delivery to other state-owned entities or third party users. The Private Party is responsible solely for the operation and maintenance of the distribution network and deals solely with the Contracting Authority (except to the extent it is under an obligation to establish and/or manage a tariff collection system involving end user contact). It does not bear revenue risk. No or limited land acquisition is required as the project involves the rehabilitation of an existing system, although provision of land access to undertake rehabilitation works will need to be considered.

Market Approaches

The concession model structure is more common for a water distribution PPP contract for the reasons outlined above. See Type of Project and Scope Considerations. Many jurisdictions have a nationally overarching regulated water market which incorporates a licensing and tariff setting regime. In addition to rehabilitation, PPP projects may involve new build/extension and/or a combination of all these elements.

As an alternative to PPP approaches, there are other contractual structures and procurement models that Contracting Authorities can use to deliver water distribution infrastructure with private sector involvement. These include direct procurement of certain elements of the network, or privatising and regulating the water market through a licensing and tariff regime under an independent regulator. 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

Under a concession model the Private Partner is effectively granted the right to operate the water distribution and delivery business for the concession term. Project revenues are generated through water tariffs paid by users for water delivered to them. The Private Partner collects water tariff payments, which will typically be set under the concession agreement (unless there is an overarching regulated market with an independent regulator, in which case water businesses are typically granted licences to operate and tariff-fixing is dealt with under that regulated regime – this matrix does not contemplate this form of regulated regime and associated regulated pricing mechanisms). Subject to any minimum revenue support and the conditions of the concession granted, the Private Partner will bear demand and revenue risk.

Water tariffs are typically set according to a formula which takes into account capital costs and efficiency levels and are adjusted periodically. The cost consequences of certain risks in this matrix will feed through to elements of the tariff formula and therefore may not be expressed or allocated contractually in the way described for an availability model. Due to political and affordability-related concerns, water tariffs may be set at a level below cost-recovery and consequently some form of government subsidy is likely to be required to be viable. This may be in the form of a minimum revenue guarantee or maintenance/rehabilitation cost subsidy, depending on the project model.

Under an availability model, project revenues are generated through availability payments by the Contracting Authority under the PPP contract. The payment mechanism will comprise a combination of availability payment by the Contracting Authority as well as a performance-based payments and sanctions system based on performance standards such as leakage reduction, quality, availability and volume of water distributed.

Other Considerations

Staged operation commencement: Given the nature of an existing water distribution network, it is likely that the Private Partner will be operating the asset at the same time as carrying out its rehabilitation programme. Consideration on the phasing of works, so that strengthening of tariff collection coincides with improving levels of service, rather than disruption of service which can lead to public dissatisfaction and protest, is important. See also Environmental risk and Social risk. It should also enable the Private Partner to generate some revenue immediately (subject to the level of rehabilitation required and the system design) under both the availability and concession models, with appropriate price/tariff adjustments to cater for the level of service being provided before, during and after the relevant works. This can help increase cash flow during the overall rehabilitation and operation process, reduce the Private Partner’s financing costs and incentivize the phasing of construction/rehabilitation works in order to ensure critical components are completed in a timely way. If there are significant components of the project that need to be completed or areas to be rehabilitated, the Contracting Authority may want to tie the Private Partner to particular milestone dates or a particular programming schedule. This may increase the complexity of the rehabilitation programme, limit the Private Partner’s ability to mitigate delays and/or have agreed damages attached to them, which can increase the risk to the Private Partner.

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 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.

Financing: As the Private Partner may be able to generate revenue at the same time as carrying out rehabilitation works, it may be able to reduce its upfront financing costs and obtain financing on enhanced terms as the project develops. In a concession model it should ensure it has analyzed existing and potential water demand.

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, ground and existing asset condition surveys: See PPP Project Preparation and Delivery in the Introduction. Detailed surveys should be carried out where practicable so that the Contracting Authority understands the risks facing the project. 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. The Contracting Authority should ensure it has commissioned and analyzed demand forecasts for water in the area potentially served by the distribution network.

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 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]
In a rehabilitation project, there may be no requirement for other land to be available apart from the site to be rehabilitated. However, this will depend on the scope of the project.

Although other land may not be required, the Contracting Authority will be typically be required to grant the Private Partner all land rights it requires to implement the project and to facilitate access to the distribution network, and so will need to ensure that it has these rights in order to grant them. (See Access to the site and associated infrastructure below.) 

If other land is identified as being needed, the Contracting Authority may bear the risk of 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. 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/accessing the site and those that will affect the rehabilitation and operation of the distribution system. This includes assessing how much of the distribution network infrastructure is undergrounded and the associated risks. 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. Reinstatement requirements must also be considered. 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 land for any part of 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.

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 any new land.

Rights to cross third party land may be required in order to access the existing pipe network.

Timing of provision of required land

Public Risk
Public Risk

Acquisition pre-signature: To the extent any land is needed as part of the rehabilitation project, 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).

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 any new land.

Rights to cross third party land may be required in order to access the existing pipe network.

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 any new land.

Rights to cross third party land may be required in order to access the existing pipe network.

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 rehabilitation works) 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 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 provide access to the existing network and be able to secure the availability of any new distribution areas, but the suitability of the allocated access may be dependent on the Private Partner’s design and rehabilitation plan. This will apply to both underground and overground suitability, to the extent the network is (or is planned to be) above or below ground. See also Design risk.

Underground: [Circumstance Dependent Risk]
In projects where most of the existing network is underground, data may be available.  However, if no or unreliable data is available and the risk cannot be transferred (or transferring the risk does not represent value for money), risk with regard to stability and suitability of the underground may sit with the Contracting Authority.  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. The importance of this risk may depend on the extent to which the Contracting Authority’s specification and Private Partner’s solution requires extension of the network into new areas. See also Site condition under Land availability, access and site risk.

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. As the water distribution network already exists, fewer consents may be necessary than for a new build project. This will depend on the scope of the rehabilitation and consents to access the system to be rehabilitated may be required.

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

Some markets (particularly regulated markets) may require certain licences and consents to be obtained, in order to rehabilitate and operate a water distribution system (e.g. in relation to water supply, construction and operation of the system and environmental permits).

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

Obtaining access to relevant parts of the distribution network to carry out rehabilitation works may be difficult and costly depending where it is located – for example, if it is under or crosses other infrastructure (such as a road or other utility pipes) or under or across private property.

The Contracting Authority will typically be required to grant the Private Partner all land rights it requires to implement the project. Failure to provide access may be treated as a compensation event. See also MAGA risk.

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.

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 rehabilitation and operation of the distribution system.

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 and Vandalism under Construction risk and Operating risk.

Market Comparison Summary

For example, where there is public opposition to the distribution system (for example, on environmental grounds), 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 relocations. Costs and delays caused by re-location or diversion of existing utilities which are due to the Private Partner’s design or construction plan are usually allocated to the Private Partner. For connections to existing infrastructure, see 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 rehabilitation timetable and ultimately on meeting relevant operation commencement dates. 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.     

Where existing utilities will remain in place at or in the vicinity of the site, the Private Party may be required (or wish) to enter into crossing agreements or proximity agreements with the owners of the relevant utilities

MARKET COMPARISON SUMMARY

In some markets or challenging locations, there may be little data on location of utilities (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, 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.

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 or underground), 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.

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 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. The impact of rehabilitating the water distribution system on communities must be carefully assessed and managed by the parties as contamination of a water distribution system will affect the morbidity and mortality rates of users.

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. Existing environmental conditions which cannot be adequately catered for or priced may to be retained by the Contracting Authority.

See also Environmental risk and Change in law risk.

Existing asset condition

Public Risk
Private Risk
Private Risk
Public Risk

Where the project is to rehabilitate existing assets, 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. This is a key risk in a water distribution rehabilitation project as the condition of the system to be rehabilitated may be challenging for the Private Partner to fully assess and price. There may need to be a mechanism for the Contracting Authority to support rehabilitation and maintenance costs to a certain level if the project is likely to be financially unviable for the Private Partner otherwise.

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.

Market Comparison Summary

Some water projects have proved financially unviable for the private sector due to the state of disrepair and high maintenance costs of the existing distribution network.


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

Public Risk
Private Risk
Public 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

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

Availability model

Shared Risk
Shared Risk

Concession model

Shared Risk
Private Risk
Private 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