Once the risks associated with an initiative have been assessed, these risks should be assigned to the entity best able to manage them most cost-effectively. Almost any risk can be transferred, if the proponent is willing to pay for this risk transfer. Decisions related to which risks an entity will retain and which it will transfer will dictate to some degree which financing and procurement model an entity may use to develop its infrastructure initiative.
The following chart can assist in allocating risk between/among potential initiative partners.
Figure 3.5 - Risk Assessment Guide
| RISK | APPLICABLE TO THIS INITIATIVE? | WHO ASSUMES THE RISK? | ||
| Yes | No | Private Sector | Public Sector | |
| Policy Risks |
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| Change in government policy |
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| Change in legislation |
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| Site Risks |
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| Appeal of legal ownership of the site or rights of way |
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| Above market acquisition price |
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| Unexpected due-diligence costs |
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| Cannot secure financing for the acquisition of the site |
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| Previously undiscovered environmental problems |
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| Previously unknown geotechnical stability concerns of the site |
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| Increased costs in municipal applications |
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| Higher-than-expected municipal requirements to rezone the site |
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| Delays Longer-than-expected time to find appropriate site, close purchase or municipal process Land assembly increases the probability of delays occurring |
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| Design Risks |
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| Scope creep-wrongly specified requirements or misinterpretation of design |
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| Mechanical, electrical and Heating, Ventilation and Air Conditioning (HVAC) systems are not designed according to sponsor's specifications |
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| Default of consultants |
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| Construction Risks |
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| Higher material and labour costs due to inflation |
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| Construction delays-labour strikes, shortage of labour, scheduling, weather, safety violations, delay in receipt of material |
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| Construction takes longer than expected (due to poor understanding of construction process) |
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| Default of contractor risk |
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| Subcontractor risk-associated with a default by a subcontractor-will need to make emergency provisions and additional costs in finding replacement |
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| Higher-than-market construction costs |
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| Liability Risks |
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| Legal liability of ownership |
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| Operations Risks |
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| Higher-than-projected operating costs-due to error in estimates used in pro forma |
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| Higher operating costs due to inflation-utility and maintenance |
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| Occupancy risk-lower or higher requirements |
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| Higher asset management and overhead costs |
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| Default of property management |
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| Disruption of building use due to unforeseen circumstances-force majeure, equipment failure or utility stoppage |
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| Capital Repairs |
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| Capital maintenance of building structure and systems |
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| Overlooked design, construction and manufacturing defects or design elements cause unexpected problems |
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| Periodic maintenance not performed when appropriate, which increases probability that the building underperforms (higher utility costs) and the residual value depreciates more than if it was properly maintained |
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| Technology changes impacting delivery of building automation systems |
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| Legislative and/or government occupancy requirements (i.e., accessibility) may lead to changes to the tenant improvements or base building |
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| Investment Risks |
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| Tenant default |
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| Releasing/vacancy risk at end of term |
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| Market conditions change, affecting market value of the property |
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| Expropriation |
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| Interest rate increases or fluctuations |
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| Financial structure risk |
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| Residual value-uncertainty of the value of the physical asset at the end of 20/25/30 years |
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| Other Risks |
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| Re-leasing risk at the expiry of the lease |
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| Default of developer/investor |
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| Higher corporate, capital or other taxes or entity (such as a pension fund or not-for-profit entity) becomes subject to taxes |
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