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P3-VALUE: Risk Assessment Tool User Manual

December 30, 2013

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Appendix C: Risk Mitigations and Considerations

The following draft risk mitigation strategies leverage past experience of other P3 projects in the transportation sector. The table may serve as a starting point to help a project team systematically think through the broad range of risk mitigation strategies that could be applied to the P3. The appropriate risk mitigation strategy will vary by risk, from project to project, and over time. It is important that this exercise is undertaken on all projects and revisited periodically over the life of the project to help certify that the strategies are effectively mitigating the risk.

Reminder: The following mitigation strategies are provided for general information purposes only.

Mitigation Strategies Considerations
Public involvement The public sector may wish to conduct an opinion survey with the goal of accurately gauging public opinion.
Public relations The public sector and the private sector must agree on an appropriate public relations strategy and community involvement strategy.
Consideration of proposals at each stage The public sector may wish to include the right to submit comments on the design at specific milestones. If the public sector does not retain this authority, the design will proceed and the public sector authority will cover any cost related to subsequent changes.
Design requirements in bids The design requirements are to be agreed upon and finalized prior to financial close. The design submitted with the bid submission may be sufficiently advanced to allow the private sector sources of financing to decide that they are likely to be willing to commit funds.
Commissioning tests Compliance with environmental requirements is rigorously assessed during commissioning.
Warranties Flaws in design or construction may occur if rolling stock, infrastructure, electrical, mechanical, and civil works sub-contractors fail to meet the requirements of the project. These flaws may be covered by sub-contractor warranties. The public sector can have the ability to specify warranty requirements for the project.
Site investigations/ surveys The public sector may be responsible for the initial identification of utilities on the site.
Withholding of public sector payments The public sector may withhold a proportion of milestone payments, which may be paid on the completion of commissioning and acceptance.
Extensions of the concession term The public sector may choose to extend concession milestones to retain operating period at the same duration.
Concession agreements The scope of all change requirements is to be limited. The public sector may consider involving user groups in the design phase to avoid scope changes later. Cost overruns as a result of change requirements by the public sector will be fully funded by the public sector and the private sector will obtain compensation for loss of revenue and / or increase in operating costs arising from a change requirement requested by the public sector. The possibility of change in requirements during operation is covered by the concession agreement.
Indexation mechanisms in maintenance contracts The public sector needs to consider that proponents may submit bids in real terms. Payments may need to be adjusted based on CPI.
Operating contracts The private sector secures long-term maintenance contracts with established indexation mechanisms.
Comprehensive insurance packages As far as possible, cost overruns and loss of revenue resulting from the occurrence of a force majeure event may be covered under a comprehensive insurance package.
Buy-out rights For projects where there is a significant risk that the public sector withdraws the project, the private sector is less likely to want to invest their own time and money and thus produce the possibility of a less than fully competitive procurement process. Buy-out clauses may be used to incentivize private sector participation.
Performance regimes to encourage service delivery The private sector's remuneration will be adjusted in accordance with its delivery of the service and performance specifications. In certain circumstances, failure to meet standards may result in rectification orders, followed by the right of the public sector to take remedial action at the private sector's expense.
Independent engineers' signing of certificate of final completion Independent engineers are fully satisfied with all the aspects of the infrastructure prior to the issuance of the operating permits.
Review mechanisms A review mechanism can be structured to pass on cost savings or overruns on a cyclical basis from the private sector to the public sector.
Operating contracts An operating contract can be entered into on a fixed price basis that includes a penalty / incentive scheme based on performance.
Maintenance contracts (between concession company and maintenance contractor) Long-term firm price maintenance contracts may be signed with major suppliers for a period of time to be negotiated before financial close.
Quality and track record of operator As part of the RFQ process, a review of all major sub-contractors to the concessionaire may be conducted.
Equity Both the public and private sectors have sufficient capital to reasonably manage risk.
Hedging If the public sector is assuming the interest rate risk between bid submission and financial close, a hedging strategy may be considered.
Share arrangements Certain risks may become difficult to insure (to the point that transferring cost risk in relation to these items would not be economic). It may be more efficient for the public sector to procure/provide insurance.


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