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Unformatted text preview: Volume • Compensation and termination clauses • Revenue • Changes of law • Environmental/archeological • Economic shifts • Regulatory/contractual • Currency/foreign exchange • Payment structure/mechanism • Taxation constraints • Transaction cost • Moral hazard • Construction cost • Loss of control of assets • Maintenance cost • Political stability • Life-cycle cost • Protectionism • Liability/latent defects • Public acceptance Consequences and Mitigation Strategies for Major
Types of PPP Project Risks
Category Description Consequences Mitigation Site Conditions • Existing structures may
• Contamination of site.
• Necessary approvals may
not be obtained. • Additional
construction costs and
• Clean up costs. • Commission studies to investigate
suitability of site and structures
• Private sector to incorporate risk through
refurbishment during construction phase. Design,
Risk • Facility incapable of
delivering at the
• Physical or operational
cannot be completed. • Increase in recurrent
revenue. • Seek reputable constructors with strong
• Private party may pass risk to
builder/architects while maintaining primary
• Link payments to progress. Financial • Interest rate risk.
• Financing unavailable.
• Contingent funding
requirements. • Increased project
cost. • Interest rate hedging.
• Financial due diligence.
• Bank/capital guarantees from companies
and directors. Operating • Inputs, maintenance may
yield higher costs.
• Changes to government
with respect to facility
operations. • Increase in
• Adverse effects on
quality and service
delivery. • Long-term supply contracts where
quality/quantity can be assured.
• Upfront specification by public
sponsoring agency. Consequences and Mitigation Strategies for Major Types of
PPP Project Risks (Continued)
Risk Category Description Consequences Mitigation Market • Fluctuations in
inflation. • Lower revenues.
• Diminution in real
returns to the private
party. • Private operator to seek an availability
payment element to minimize impact on risk
• Review likely competition for service and
barriers to entry. Legislative • Additional
during the course of
the project cannot
• Changes in laws
and regulation. • Further development
or change in business
operation may be
• Increase in operating
costs with regards to
complying with new
laws. • Private sector to anticipate requirements.
• Public sponsor may mitigate such change
by monitoring and limiting changes which
may yield adverse consequences. Asset
Ownership • Loss of the
termination of lease
or other project
breach and without
adequate payment. • Loss of investment
by private party
• Possible service
disruption as additional
capital costs are
incurred to upgrade the
asset to the agreed
value and useful life. • Private party will be given cure rights to
• Public sector sponsor may make payment
for value in the project on a cost-to-complete
basis if termination occurs pre-completion.
• Impose on the private party maintenance
and refurbishment obligations.
• Secure services of a reputable maintenance
contractor with strong financial credentials. Benefits of PPPs
8. Stronger working relations
Reduction of financial constraints
Innovation and expertise
Greater cost efficiency and productivity
Integration of various stages of development
Risk management Concerns of/about PPPs
Potential higher life-cycle costs -- private sector may demand
higher rate of return than public sector.
No concerns for externalities & social benefits
Federal government does not allow accelerated depreciation
Concession uses only taxable debt and equity (no tax-exempt debt
financing) Moral hazard
Loss of control over assets
Loss Critical Success Factors for PPPs
PPP has to:
Improve “service quality”
Promote socio-economic development
Consultation with and support of stakeholders
Public sector’s active involvement
Secure public control
Appropriate risk sharing and rewards
Effective working relationships among partners during and after contract
Legal Legal Issues Associated with Transportation
Infrastructure Project PPPs
Legal capacity of parties and legal
requirements of the sponsor to provide
Ability of the private sector to be involved
in infrastructure development, particularly
Ability of the private sector to acquire and
own public-use infrastructure, especially
Existence and legal basis of cost recovery
Ability to provide performance guarantees
Property issues of land acquisition –
condemnation, use, and disposal
Dispute resolution and liability provisions
Special provisions asso...
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This note was uploaded on 07/25/2012 for the course ECON 111 taught by Professor King during the Spring '12 term at CSU Bakersfield.
- Spring '12