Risk Category

Description

Consequence

Mitigation

Preferred allocation

Sponsor

Sponsor risk

The risk that the private party is unable to provide the required services or becomes insolvent or is later found to be an improper person for involvement in the provision of these services or financial demands on the private party or its sponsors exceed its or their financial capacity causing corporate failure.

Cessation of service to government and possible loss of investment for equity providers.

Ensure project is financially remote from external financial liabilities, ensure adequacy of finances under loan facilities or sponsor commitments supported by performance guarantees; also through the use of non-financial evaluation criteria and due diligence on private parties (and their sponsors).

Government bears the provision.

Probity

The risk that after execution of contracts the private party is found to be an improper person for involvement in the provision of the contracted services.

Possible cessation of service to government, management crisis and/or forced change in ownership.

Government can mitigate this risk by assessing the probity of the private parties and their sponsors when evaluating the bids.

Further, the contract will generally have provisions allowing government to ensure continuity of physical delivery of essential services.

Government

Financial

The risk that after execution of contracts the private party becomes insolvent or financial demands on the private party or its sponsors exceed its or their financial capacity, causing corporate failure.

Possible cessation of service to government, forced change in ownership and/or possible corporate failure causing financial loss to private party.

Government may mitigate this by ensuring the project is financially remote from external financial liabilities, ensuring adequacy of finances under loan facilities or sponsor commitments supported by performance guarantees; and by due diligence on private parties (and their sponsors). Contractual provisions will allow the government to ensure continuity of physical delivery of essential services.

Government ultimately bears this risk because it can affect the provision of adequate public services. However, the government would have the right to terminate the private party in such circumstances and the private party would bear any financial losses associated with termination.

Technical

The risk that the private party is unable to deliver the required infrastructure and/or operational systems in the required timeframes.

Non-delivery or cessation of service to government.

Government will mitigate this risk by assessing the experience and technical competence of the private party to deliver the required infrastructure and operational systems. Contractual provisions will allow the government to ensure continuity of physical delivery of essential services and to abate service payments for non-performance.

Government ultimately bears this risk because it can affect the provision of adequate public services. However, the government would have the right to terminate the private party in such circumstances and the private party would bear any financial losses associated with termination.

Operational

The risk that the private party is unable to effectively manage the service delivery operations.

Cessation or reduced quality of service to government.

Government can mitigate this risk by assessing the experience and competence of the private party to manage and deliver the required services. Private party may be required to provide performance guarantees during the operation phase. Contractual provisions will allow the government to ensure continuity of physical delivery of essential services and to abate service payments for non-performance.

Government ultimately bears this risk because it can affect the provision of adequate public services. However, the financial impact of poor performance would be borne by the private party.

Interest rates pre‑completion

The risk that prior to completion, interest rates may move adversely and undermine bid pricing.

Increased project cost.

Both government and the private party would manage this risk by hedging interest rates.

Government usually takes interest rate risk up until financial close and during the operations period but not during the construction period(s). The private party takes this risk during the construction period(s).

Financing unavailable

The risk that when debt and/or equity is required by the private party for the project it is not available then and in the amounts and on the conditions anticipated.

No finance to progress or complete construction.

Government will try to mitigate this risk by requiring all bids to have fully-documented financial commitments with minimal and easily achievable conditions.

Government ultimately bears this risk because it can affect the provision of adequate public services. This is despite the fact that government would have the right to terminate the private party in such circumstances.

Further finance

The risk that where government is required under the contract to pay for a variation, the private party cannot obtain finance. In this case, the government must pay for the variation up-front instead of through an adjustment of the service charge.

No financing available to complete further works required by government.

Government can mitigate this risk by:

- contractually requiring the private party to exercise commercial and prudent endeavours to obtai financing acceptable to government; or

- where it believes such variations are inevitable (particularly during the construction phase) requiring the private party to put in place a variation facility.

Government takes the risk that private finance is unavailable.

Change in ownership

The risk that a change in ownership or control of the private party results in a weakening in its financial standing or support or other detriment to the project.

Government assurance of the financial robustness of the private party may be diminished and, depending on the type of project, probity and other non-financial risks may arise from a change in ownership or control which may be unacceptable to government.

Government can mitigate this risk by requiring its consent prior to any change in control.

This is generally a shared risk in the sense that the government will bear the risk that the change in ownership has an adverse effect on the project and the private party bears the risk that the revised structure inhibits its ability to perform the project leading to termination.

Refinancing benefit

The risk (upside) that at completion or other stage in project development the project finances can be restructured materially to reduce the project's finance costs.

A beneficial change in the financing cost structure of the project.

Government will contractually require the private party to share half of any gains made during a refinancing (subject to the project meeting its projected equity return).

The benefit of this risk will be shared equally by government and the private party.

Tax changes

The risk that before or after completion the tax impost on the private party, its assets or on the project will change.

A negative effect on the private party's financial returns and in extreme cases, it may undermine the financial structure of the project so that it cannot proceed in that form.

NSW: With respect to specific infrastructure tax, particularly relating to transactions with government, the private party will be required to obtain a private tax ruling from the ATO.

Victoria: The private party can mitigate against this by ensuring that its financial returns can withstand such change.

Private party.