Government should seek to mitigate sponsor and financial risk by ensuring that only reputable and capable parties are part of shortlisted bidding consortia. Government should also seek to ensure that it does not simply choose the lowest cost bid, but the bid with a financially robust structure, and which is likely to earn appropriate returns from the project while achieving value for money.
In summary, the steps to mitigate financial risks have a number of common themes:
• contractual and financial commitment certainty
• strength of commitments by the project sponsor(s)
• the capability and reputation of the project sponsor(s), other contracting parties and the providers of debt and equity
• the robustness of the financial case or model on which the private party has based its participation in the project
• government consideration of the consequences of failure to perform by any part of the private party consortium and agreement on appropriate rights. This may include a government right to take over some or all of the contracts the private party may have entered into
• establishment of a structure which helps ensure, over the course of the project, that the sponsors are of sufficient stature and the key sub-contractors remain able to meet their contractual obligations.
Potential proponents should note that government will typically require all bid models to be lodged for perusal. A satisfactory review of the models will be a condition precedent to final approval.