5.5. Other Risks

Most of the residual risks such as force majeure risks, risk of Governmental action (early termination of the contract or expropriation) also referred to as political risk, changes in law or regulation, are usually addressed in the concession agreement. Any risk left open may need to be suitably priced and taken care of in the financial projections.

The remedy for commercially insurable risks is usually insurance cover that the concessionaire is expected to take. This needs to be suitably provided for in the financial projections. Further, though several risks/events may be identified and listed, unless one of the parties is materially adversely affected by the event and impaired from performing its obligations no relief can be sought. Any excuse from performance of obligations would also similarly only last till such time that the ability to perform is impaired. The bulk of the commercial risks will be addressed if completion, revenue and O&M risks are comprehensively evaluated.

Financing risk, while passed on to the private partner to an extent, is taken care of in the contract document (in case financial close is not achieved within the time stipulated). It is important that financing documents submitted by the private partner (if stipulated in the agreement) are evaluated for the possibility of interest rate or currency risk, so that one can prepare for any adverse situation. Ideally foreign currency debt should not be used to finance a project where revenues are entirely rupee-denominated - unless suitable hedging mechanisms are put in place. Interest rate risk (floating or fixed or with re-pricing options) could be similarly evaluated. The tenure of the debt should be long enough to ensure that cash flows are not unduly stressed.

Environmental and social risks are identified in the EIA/SIA study undertaken as part of the process of project preparation. Since the bulk of these risks are absorbed by the Governmental Authority, it is important to put in place a plan to ensure that the project is insulated from the risks of land acquisition, environmental advocacy and social issues such as resettlement and rehabilitation issues and compensation claims etc. so that implementation is not hampered.

Issues such as access in a road project or location of a MSW treatment plant, need to be adequately discussed as part of a public consultation process for the project and dealt with early in the development cycle.

Typical Risks in a Road project are set out in the table below:

Risk type	Description
Pre-operative task risks
Delays in land acquisition	Refers to the risk that the project site will be unavailable or unable to be used within the required time, or in the manner or the cost anticipated or the site will generate unanticipated liabilities due to existing encumbrances and native claims being made on the site.
External linkages	Refers to the risk that adequate and timely connectivity to the project site is not available, which may impact the commencement of construction and overall pace of development of the project.
Financing risks	Refers to the risk that sufficient finance will not be available for the project at reasonable cost (eg, because of changes in market conditions or credit availability) resulting in delays in the financial closure for a project.
Planning risks	Refers to the risk that the pre-development studies (technical, legal, financial and others) conducted are inadequate or not robust enough resulting in possible deviations from the planned or expected outcomes in the PPP project development.
Approvals risk	Refers to the risk that necessary permits, authorisations and approvals required prior to the start of construction are not obtained in a timely fashion, resulting in delays to construction and the project as a whole.
Construction phase risks
Design risk	Refers to the risk that the proposed design will be unable to meet the performance and service requirements in the output specification. It can result in additional costs for modification and redesign.
Construction risk	Refers to the risk that the construction of the assets required for the project will not be completed on time, budget or to specification. It may lead to additional raw materials and labour costs, increase in the cost of maintaining existing infrastructure or providing a temporary alternative solution due to a delay in the provision of the service.
Approvals risk	Refers to the risk that delays in approvals to be obtained during the construction phase will result in a delay in the construction of the assets as per the construction schedule. Such delays in obtaining approvals may lead to cost overruns.
Operation phase risks
Technology risk	Refers to the risk that the technology used will be unexpectedly superseded during the term of the project and will not be able to satisfy the requirements in the output specifications. It would result in increased costs of a replacement technology.
Operations and maintenance risk	Refers to the risks associated with the need for increased maintenance of the assets over the term of the project to meet performance requirements.
Traffic risk	Refers to the risk that demand for a service will vary from that initially projected, such that the total revenue derived from the project over the project term will vary from initial expectations. There is no risk in annuity contracts.
Payment risk	Refers to the risk that tolls are not collected in full or are not set at a level that allows recovery of costs. This is a risk for the public sector under shadow tolls and for the private sector under user tolls. There is no risk in annuity contracts.
Financial risk	Refers to the risk that the private sector over stresses a project by inappropriate financial structuring. It can result in additional funding costs for increased margins or unexpected refinancing costs.
Handover risks
Handover risk	Refers to the risk that the concessionaire will default in the handover of the asset at the end of the project term or will deviate from the minimum quality/ value of the asset that needs to be handed back to the public entity.
Terminal value risk	Refers to the risk relating to differences from the expected realisable value of the underlying assets at the end of the project.
Other risks
Change in law	Refers to the risk that the current legal/regulatory regime will change, having a material adverse impact on the project.
Force Majeure	Refers to the risk that events beyond the control of either entity may occur, resulting in a material adverse impact on either party's ability to perform its obligations under the PPP contract.
Concessionaire risk	Refers to the risk that the concessionaire will prove to be inappropriate or unsuitable for delivery of the project, for example due to failure of their company.
Sponsor risk	Refers to the risk that the Sponsor will prove to be an unsuitable partner for the project, for example due to poor project management or a failure to fully recognise the agreed terms of the Concession Agreement.
Concessionaire event of default	Refers to the risk that the private partner will not fulfil its contractual obligations and that the Government will be unable to either enforce those obligations against the sponsors, or recover some form of compensation or remedy from the sponsors for any loss sustained by it as a result of the breach or the private partner will prove to be inappropriate or unsuitable for delivery of the project.
Government event of default	Refers to the risk that the Government will not fulfil its contractual obligations and that the private partner will be unable to either enforce those obligations against the Government, or recover some form of compensation or remedy from the Government for any loss sustained by it as a result of the breach.