Risk Category

Description

Consequence

Mitigation

Preferred allocation

Operating

Inputs

The risk that required inputs cost more than anticipated, are of inadequate quality or are unavailable in required quantities.

Cost increases and in some cases adverse effect on quality of service output.

The private party can manage this risk through long-term supply contracts where quality/quantity can be assured.

This risk is generally allocated to the private party, although in limited circumstances government may take back some of this risk through benchmarking or where it controls inputs, e.g. water catchment.

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, in core services model, a corresponding adverse effect on government's ability to deliver core services.

The private party can manage this risk through long-term sub-contracts with suitably qualified and resourced sub-contractors and through formal or informal consultation processes with government.

Private party.

Changes in output

Specification outside agreed specification range

The risk that government's output requirements are changed after contract signing whether pre- or post- commissioning.

A change in output requirements prior to commissioning may necessitate a design change with capital cost consequences depending on the significance of the change and its proximity to completion.

A change after completion may have a capital cost consequence or a change in recurrent costs only; for example, where an increase in output requirements can be accommodated within the existing facility capacity.

Government can mitigate this risk to an extent by minimising the chance of its specifications changing and, to the extent they must change, ensuring the design is likely to accommodate it at least expense.

This will involve considerable time and effort in specifying the outputs up-front and planning likely output requirements over the term.

Government.

Operator failure

The risk that a sub-contract operator may fail financially or may fail to provide contracted services to specification.

The failure may result in service unavailability, an inability for government to deliver core services and, in each case, a need to make alternate arrangements for service delivery with corresponding cost consequences.

The private party can manage this risk by carrying out necessary due diligence on all subcontractors.

Government may carry out due diligence on principal subcontractors for probity and financial capacity and commission a legal review of the major subcontracts including the guarantees or other assurances taken by the private party. If failure does occur, the private party may replace the operator or government may require operator replacement.

The private party.

Technical obsolescence or innovation

The risk of the contracted service and its method of delivery not keeping pace, from a technological perspective, with competition and/or public requirements.

The private party's revenue may fall below projections either via loss of demand (user pays model) payment abatement (availability model) and/or operating costs increase. For government, consequence may be failure to receive contracted service at appropriate quantity/quality including adverse effect on core service delivery in core service model.

The private party can manage this risk by arranging a contingency/reserve fund to meet upgrade costs subject to government agreement as to funding the reserve and control of reserve funds upon default.

This risk can also be mitigated through its monitoring obligations in the contract and the development of detailed, well-researched output specifications (government) and design solution (private party).

The private party except where contingency is anticipated and government agrees to share risk possibly by funding a reserve.