Key risk

DSS

Mainly DSS

Shared

Mainly NEP

NEP

Comments

Risks that apply in the Design and Build Phase

Vital planning consents not forthcoming

•

Each side bears their own costs if the project is ended by lack of planning permission.

Planning consents less favourable than expected

•

NEP guarantees minimum development proceeds of sites. The Department shares in additional gains.

Bad ground conditions lead to construction difficulties

•

The Department retains some risk for the discovery of unknown structures below ground on existing sites.

New build or refurbishment costs are higher than expected

•

Refurbishment or new build is delayed

•

NEP is not responsible for "excusable delay". Otherwise payment begins when the Department accepts premises.

Cost of Department's accommodation if new premises are delayed

•

Excusable delays not borne by NEP. Otherwise, the Department has legal remedies.

Risks in the Operational Phase

Rental and maintenance cost of leased properties that are retained for the Department's use

•

Risk rests with the Department unless any costs might fall within the scope of dilapidations, which are NEP's risk. NEP bears the costs if new buildings are delayed and leases must be extended.

Long-term building defects emerge, or reduced asset life

•

NEP bears the costs of replacement or renewal

Basic maintenance costs are higher than expected

•

General inflation of maintenance costs is higher than expected

•

Borne by the Department through indexation of this element of NEP's prices.

Information Technology cabling does not perform as required.

•

NEP bear the risk in the passive IT systems such as cabling.

Technology/ obsolescence

•

Mainly DSS's risk. However, cabling used will support all IT developments foreseen at the time of completing the deal.

Insurance for damage and 3rd party risks

•

NEP's risk, except where insurance is not available in the market in which case Department acts as insurer of last resort.

Accommodation unavailable

•

No payment by DSS if the space is deficient, subject to the force majeure arrangements.

Space not required by DSS/Government

•

DSS can surrender 20% space-by-value-free of direct charge.

Space is more intensively used by DSS than planned

•

DSS can make maximum proper use of the accommodation.

DSS require different services or methods

•

The contract change mechanism comes into play.

DSS terminates contract without operator default

•

The Contributions Agency told us that it is unlikely that the Department will exercise its right to terminate the contract voluntarily. The risk of operator default is borne mainly by NEP.

Prices of optional facilities management services, eg cleaning are higher than expected

•

These services are outside the scope of the signed Private Finance contract, and will be contracted for separately by DSS.

A general change of law, eg health and safety in offices, increases costs

•

NEP's liability is capped.

Taxation increases operators' costs

•

As per change-of-law risk.

Force majeure

•

Risks that apply throughout the contract

Financing costs are higher than expected

•

Borne by NEP, unless a Change of Law affects funding.

The condition of existing buildings is worse than was known at bid stage, or latent defects materialise at a future date

•

Latent defect risks are borne by NEP.

A change of law specific to DSS increases costs

•

Risks that apply at the end of the contract

Residual value of the buildings at the end of the contract is lower than expected

•

Residual value is set at 20% of historic cost.

Source: Examination of the contract by the National Audit Office and Theodore Goddard, and a Post-Completion Review of Contract Documentation by Ernst & Young.

This analysis is intended to provide an overview of the allocation of risks under the contract, and is not intended to give comprehensive coverage of this complex contract.