A typical Partnership Victoria contract transfers many risks to the private party. Many of these are managed as 'business as usual' by the private party and its subcontractors, with any materialisation of these risks having manageable impacts on the private party's financial position and service delivery performance. (These impacts provide an incentive for the private party to appropriately manage these risks.) However, some other transferred risks require specific ongoing management action, and the project as a whole can be put at risk if this action is not taken. Examples of such risks include:
• compliance with the output specification - the private party's performance against the contractual KPIs will typically be measured and reported on a monthly basis. However, the contract requires the private party to comply with the output specification, not just the KPIs. If the private party meets the KPIs but does not comply with the output specification, the long term project outcomes may be at risk. Hence while the immediate risk (compliance with the output specification) has been transferred to the private party, a failure by the government party to enforce this risk transfer has consequences for the Government. The contract director should therefore establish a process for monitoring and enforcing the private party's compliance with the output specification, using rights under the contract as necessary;
• insurable risks: - the private party is required to maintain certain insurances under the Partnership Victoria contract in order to protect it against certain risks. During the service delivery phase of the project, these insurances must be regularly renewed. If the insurance is not renewed on the appropriate terms and the relevant risk materialises, the private party may not be able to manage the consequences of the risk, resulting in project failure;
• refinancing - the private party may need to refinance its existing debt (typically because its existing debt finance is for a shorter term than the term of the Partnership Victoria project agreement). If the debt is not refinanced when due, a financial default will occur;
• accreditation/certification - the private party (or a key subcontractor or employees of either of them) may be required by law or under the contract to maintain a certain accreditation or certification in order to deliver the relevant services. If the accreditation or certification is not maintained or renewed as required, the private party may be unable to provide the services; and
• asset lifecycle management and maintenance spending - the private party is required to manage the lifecycle of the project assets and to meet the cost of maintenance necessary to meet the output specification. If the assets are not managed or maintained as required, the future performance of the infrastructure may be compromised.
In each of these circumstances, the relevant risk has been transferred to the private party, however, there is significant residual risk to the government party if the private party does not implement the expected risk management processes (complying with the output specification, renewing insurances, refinancing when required, maintaining/renewing accreditations and certifications, and managing and maintaining assets). The contract director should therefore monitor the private party's management of these risks and report to senior management on this.
The following table sets out key issues to be considered and tools and processes that can be used in analysing transferred risks to develop a performance reporting plan.
Issues to be considered | Tools or processes |
What risks have been transferred and where is each one likely to have its most significant impact? What are the quantified impacts of retained risks? Has the risk profile changed? Where does the risk reside in the project? Which risks lie fully with the private party and which risks get pushed down through the structure to suppliers or subcontractors? What mechanisms have been used to allocate risk within the private party's project structure, including service level contracts, parent company guarantees, liquidated damages clauses, letters of credit? What are the private party's relationships with subcontractors, such as the construction contractor, operator and facilities maintenance contractor? Have they been in similar projects together? | Risk matrix - regular monitoring and updating of the risk matrix developed during the procurement stage Organisational chart - which entities should be monitored depends largely on where the risk resides. For example, it may be pointless monitoring at the level of a special purpose vehicle if the government party is heavily reliant on the operator and its financial health. Where a parent company has given performance guarantees, monitoring of the parent company's financial health is necessary |