These risks relate to technology, nature and costs of operations and maintenance and adherence to performance standards.

• Performance risks: refers to the risks associated with the private partner not being able to deliver/ perform as per the key performance indicators/ minimum service levels as specified in the concession agreement. It could also be referred to as O&M risks. Such non-performance would in most cases result in payment of liquidated damages from the private partner to the public entity; repeated and persistent non-performance could also result in termination of the concession agreement.

• Technology risks: includes the following aspects;

o Ability to deliver the desired level of performance: For instance, while waste-to-energy technologies may successfully process organic wastes such as manure and green wastes, processing un-segregated MSW, mixed with silt and construction material, to the desired performance levels has been a challenge

o Risk of Obsolescence (also referred to as technology obsolescence risk) - this needs to be critically evaluated for whole or components of the project, more so when the concession is for a long period of 20 - 30 years. Dealing with these risks involves careful evaluation of the likely technological changes in these areas, for which technical studies by good and credible consultants will be necessary. The use of proven technology and appropriate technology transfer arrangements, together with performance guarantees and maintenance contracts from the provider of technology, will ensure a certain level of performance.

The need to follow appropriate standards is usually reflected in the O&M specifications set out in the concession agreement and which require the concessionaire to prepare standard operating systems and procedure manuals for various aspects - operations, regular, preventive and unscheduled maintenance, safety, security etc. Periodic monitoring through site visits, reviews and project monitoring committees, help to anticipate problems during operations. To ensure that funds for major maintenance works are available, lenders and financial investors often specify the use of sinking funds and the creation of maintenance reserves (out of the cash flows).

A better understanding of these risks and how they can be mitigated will enable the prescription of the most appropriate standards and specifications, estimation of projected costs and better capacity planning for the sector.

PROJECT

24x7 Water Supply Pilot PPP Projects in Three Cities of Karnataka

Water sector PPPs typically present risks such as lack of adequate/accurate information regarding the existing systems, leading to inaccurate investment and revenue forecasts.

In order to de-risk the project, the project was envisaged as a management contract, involving the private partner from the preparatory stage and engaging their services for planning, contracting out of capital works and O&M - without passing on the investment or revenue risk.

All design, construction, operating and performance risks were borne by the public entity. The contract was structured in such a way that 40 per cent of the O&M fee payable to the concessionaire was directly related to the achievement of specified outcomes. Penalties (maximum of 10 per cent) were also included in the contract.

Source: http://toolkit.pppinindia.com/ports/module3-rocs-kuwsip1.php?links=kuwsip1