Risk category | Description | Consequence | Mitigation | Likely preferred allocation |
The risk that events such as loss events, technological change, construction of competing facilities or premature obsolescence will occur, with the result that the economic value of the asset may vary, either during or at the end of the contract term, from the value upon which the financial structure of the project is based. | ||||
Maintenance and Refurbishment | The risk that design and/or construction quality is inadequate resulting in higher than anticipated maintenance and refurbishment costs. | Cost increases where private party has assured whole of life obligation and adverse effect on delivery of contracted services and a corresponding adverse effect on government ability to deliver core services. | private party to manage through long term subcontracts with suitably qualified and resourced sub-contractors and through formal or informal consultation processes with government. | private party. |
Technical obsolescence | The risk that design life of the facility proves to be shorter than anticipated accelerating refurbishment expense. | Cost of upgrade. | private party may have recourse to designer, builder or their insurers. | private party, but in certain high technology projects costs may be anticipated and shared. |
Default and termination | The risk of 'loss' of the facility or other assets upon the premature termination of lease or other project contracts upon breach by the private party and without adequate payment. | Loss of investment of private party; possible service disruption for government. | • private party (and its debt financiers) will be given cure rights (time and opportunity) to remedy defaults by the private party which may lead to termination; • Serious breaches by the private party to lead to termination; • Upon termination the private party may receive fair market value less all amounts due to government; • government will require step in rights to ensure access and service continuity until ownership/control issues are resolved. | private party will take the risk of loss of value on termination. Government assumes risk of disruption to service. |
Residual value on transfer to government | The risk that on expiry or earlier termination of the services contract the asset does not have the value originally estimated by government at which the private party agreed to transfer it to government. | Capital costs incurred to upgrade the asset to the agreed value and useful life. | Government will impose on the private party maintenance and refurbishment obligations, ensure an acceptable maintenance contractor is responsible for the work, commission regular surveys and inspections; it may also direct funds from the project into dedicated controlled sinking fund accounts to accumulate funds sufficient to bring the asset to agreed condition and/or (if required) obtain performance bonds to ensure the liability is satisfied. | Government. |