Risk

Description

Consequence

Default Allocation

Payment Mechanism

Comments

Land acquisition

Risk that land necessary for the facility is not available or at a higher cost than estimated.

Delay and cost increases.

Entity

Condition precedent for contract effectuation.

Entity to arrange adequate budget for land acquisition and launch Request for Proposal only once a substantial part of the land has been acquired and there is reasonable likelihood that all land will have been acquired upon commercial close.

Connecting infrastructure

Risk that connecting infrastructure relevant to the construction and operation of the facility is not in place on time (e.g. power, water).

Delay and cost increases.

Entity

Condition precedent for contract effectuation

Entity to arrange adequate budget for connecting infrastructure and have appropriate arrangements for necessary connections in place with respective stakeholders.

Site Condition

Risk of site conditions impair planned construction (e.g. adverse ground conditions, archaeological finds, contamination).

Delay and cost increases.

Private

Any delay in issuance of certificate of completion will lead to delay in payments.

Entity to ensure that bid process allows for appropriate due diligence of the site condition and facilitate due diligence by making available all relevant data and access to the site.

Design

Risk that design of the facility is incapable of delivering of the services at anticipated costs.

Cost increase.

Private

Any delay in issuance of certificate of completion will lead to delay in payments.

Entity to ensure that design is delivered as agreed through an effective Project monitoring regime and facilitate in any possible cost reduction program to minimize the risk of bankruptcy.

Commissioning

Risk that project approvals may not be obtained, delayed, or with unanticipated conditions (e.g. completion certificate)

Delay and cost increases.

Private

Any delay in issuance of certificate of completion will lead to delay in payments.

Entity to ensure that bid process allows for appropriate due diligence of the necessary approval regime and facilitate due diligence by making available all relevant data.

Construction

Risk in construction that prevents the facility being delivered on time and on costs.

Delay and cost increases.

Private

Any delay in issuance of certificate of completion will lead to delay in payments.

Entity to ensure that construction is delivered as agreed through an effective project monitoring regime and facilitate in any possible cost reduction program to minimize the risk of bankruptcy.

Demand

Risk that usage of the facility is less than anticipated (e.g. unanticipated economic or demographic circumstances).

Revenue will be below projection.

Private the extent that Entity has committed to an Availability Payment element.

User charges except to the extent that Entity has committed an Availability Payment element.

Entity to consider value for money of demand risk transfer. In case of transfer of demand risk Entity to consider capping of demand risk transfer. Downside risk through Minimum Revenue Guarantees and upside risk through Benefit Sharing provision.

Performance

Risk that performance does not meet with the agreed upon service standards (e.g. availability of the facility).

Sub-standard performance

Private

Entity to include adjustment factors in payment mechanism to penalize for sub-standard performance.

Entity to ensure that contract includes or refers to unambiguous and measurable service standards and that payment mechanism includes fair and reasonable payment deductions and or penalties for sub-standard performance.

Operations

Risk that operations do not meet standards or are costlier than anticipated (e.g. technology failure, labour disputes, environmental incidents).

Cost increase.

Private.

No change allowed in payments from user and or Entity.

Entity to ensure that operation is delivered as agreed through an effective project monitoring regime and facilitate in any possible cost reduction program to minimize the risk of bankruptcy.

Inflation

Risk that costs increase over time because of inflation.

Cost increase.

Entity

Entity to include adjustment factor in payment mechanism to account for inflation to the extent applicable.

Entity to forecast inflation for the operating expenditures and agree on the portion of the payment that is related to actual inflation considering that debt service is already in nominal terms.

Interest

Risk that interest rate increases during the debt tenor.

Cost increase

Private - Entity.

Entity to include adjustment factor in payment mechanism to account for fluctuation in interest rate.

Entity to minimize exposure in the short term by including in the payment mechanism a period when payment is not adjusted for interest rate fluctuation. Entity to define period based on assessment of availability of long-term debt facilities.

Exchange rate

Risk that Saudi Riyal depreciates vis-á-vis any hard currency i.e. USD, EUR or GBP.

Loss of revenue.

Entity

Entity to include adjustment factor in payment mechanism to account for exchange rate fluctuations.

Entity to agree on portion of payment that is related to expenditures denominated in hard currency.

Change in Law

Risk that changes in legislation and regulations impact costs and or revenues upon meeting service standards.

Loss of revenues and or cost increases.

Entity

Entity to include provision in contract for adjusting payment mechanism to account for adverse discriminatory law or regulation.

Refers only to those changes in legislation and regulation that have specific impact on the project i.e. discriminatory changes. Entity to consider mitigating its exposure by only compensating adverse effects over an agreed upon Significant Amount.

Force Majeure

Risk of an extraordinary circumstance beyond the control of the parties (e.g. war, terrorism, strike, riot, crime, severe weather, geological event, ('act of God').

Prevents one or both parties from fulfilling their obligations under the contract

Shared

Entity to include appropriate provisions in the contract for addressing Force Majeure.

Disasters or other natural events that are not controllable by either party but with potential extraordinary impact should be shared.

If risks are insurable, Force Majeure should not apply, and risks are allocated to Private sector party.

Change in Specification

Risk that specifications need to be changed for any which reason.

Delays and or cost increases.

Entity

Entity to include provisions in the contract for addressing Change in Specification and impact on payment mechanism.

Entity to ensure minimization of the chance of its specifications changing and, to the extent they must change, ensuring the design is likely to accommodate it at least expense.

Residual Value

Risk that the condition of the facility is not in accordance with the agreed upon hand-back specifications.

Cost to rectify.

Private

Entity to include appropriate provisions in the contract to penalize for sub-standard residual value.

Entity to define and include in contract appropriate hand-back requirements.