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Global Infrastructure Hub | Norton Rose Fulbright

Risk Allocation in Public Private PartnershipsIPFA Risk Allocation Webinar, 21 June 2017

Mark Moseley, Chief Operating Officer, GI Hub and Nick Merritt, Global Head, Infrastructure, NRF

Global Infrastructure Hub | Norton Rose Fulbright 2June 2017

Australia United Kingdom

Saudi Arabia Republic of Korea

People’s Republic of China New Zealand

Singapore Mexico

Global Infrastructure HubA G20 initiative

The GI Hub is an independent organisation, established by the G20 to increase

the flow and quality of infrastructure investment opportunities in all countries

The GI Hub is staffed by international infrastructure specialists from both the public and

private sectors

Initial Funding partners


Global Infrastructure HubThe mandate – from the G20 Leaders’ Communique, Brisbane, November 2014

Five focus areas

Creating a global Knowledge Network of infrastructure

leaders and practitioners in Governments, International

Organisations & the Private Sector

Identifying and addressing Data Gaps that matter to

governments and investors

Promoting Leading Practices that can be replicated at

scale for transformational impact

Building Capacity within public sector and other

stakeholders

Building a global Project Pipeline to help match investors

and projects


Effective Risk Allocation in PPPs

Risks should be allocated to the party best able to manage them and will incentivise that party to mitigate against such risks

Inefficient risk transfer will mean unnecessary risk premiums are charged by the private partner reducing value for money

Appropriate risk allocation means:

Higher value for money for the public partner

Increased market participation and competition

Poor risk allocation may result in market failures such as private partner insolvencies and costly renegotiations


GIH Development of PPP Risk Allocation Tool

one of the major issues that governments face when preparing PPP projects is deciding on an appropriate allocation of risk as between the public and private parties

all PPP contracts reflect the allocation of risks which has been negotiated by the public and private partners – this risk allocation is at the heart of every PPP transaction

many private sector project developers have made the observation that governments in developing countries frequently do not have an adequate understanding of the risk allocation principles applicable to PPPs, and that guidance materials would be useful

in response, the GIH developed, with the assistance of the international law firm Norton Rose Fulbright, a set of sample PPP risk allocation matrices, i.e. based on the tool that lawyers use when preparing to draft PPP contracts


Overview of the Risk Allocation Tool

• Illustrates typical risk allocation on infrastructure projects between

the public and private partners

• For 12 sample projects across the transport, energy and water and

sanitation sectors

• Heavily annotated, to explain the different risk allocation

arrangements found in developed and emerging markets and some

common mitigation techniques

• Designed to help governments deal with risk allocation in a sample

of different projects


Projects’ locations

Europe

United Kingdom

Germany

Africa

Kenya

Nigeria

Uganda

South Africa

Asia Pacific

Thailand

Singapore

Indonesia

Australia

North America

Canada

United States

Latin America

Colombia


GI Hub PPP Risk Allocation Tool found at ppp-risk.gihub.org

ppp-risk.gihub.org


List of projects – Transport

A new toll road project, developed as a Design, Build, Finance and Operate (DBFO) transaction

A new airport project, again developed as a DBFO transaction

A new municipal light rail project, again developed as a DBFO transaction

An intercity railway project involving an existing railway, developed as a Rehabilitate-Operate-Transfer (ROT) transaction

A container terminal port project, developed as a DBFO transaction


List of projects – Energy

A new photovoltaic power generation project, developed as a Build-Own-Operate (BOO) transaction, where the power is being sold to a state-owned single buyer

A new large-scale (greater than 100 MW) hydroelectric power project, developed as a Build-Own-Operate-Transfer (BOOT) transaction, again where the power is being sold to a state-owned single buyer

A new power transmission project, developed as a BOOT transaction

A natural gas distribution project involving an existing distribution for an existing utility, developed as a ROT transaction, in a situation where the wholesale supplier of natural gas is a state-owned entity and where natural gas tariffs are set by a regulator


List of projects – Water & Waste

A new water desalination project, developed as a BOOT transaction, where the desalinated water is being sold to a state-owned single buyer

A water distribution project involving an existing distribution for an existing utility, developed as a ROT transaction, in a situation where the wholesale supplier of water is a state-owned entity and where water tariffs are set under the terms of the Concession Agreement

A solid waste collection, disposal, landfill and recycling project, developed as a BOT transaction


The PPP risks that are covered1 Land purchase and

site risk

The risk of acquiring title to the land to be used for a project, the selection of that site and the geophysical conditions of that site

2 Design risk The risk of designing the asset to achieve the functionality required to support

the desired objectives and outcomes in compliance with the output specification

3 Environmental & social risk

The risk of the existing latent environmental conditions affecting the project and the subsequent risk of damage to the environment or local communities

4 Completion (including

delay and cost overrun) risk

The risk of commissioning the asset on time and on budget and the consequences of missing either of those two criteria

5 Exchange and interest rate risk

The risk of currency fluctuations and or the interest rate over the life of a project

6 Force majeure risk The risk of third party incidents affecting a party’s ability to perform its obligations in respect of the project

7 Insurance risk The risk purchasing adequate insurance to cover key risks including the extent and availability of coverage, the cost of such cover

8 Performance/price risk

The risk that the asset is able to achieve the output specification metrics and the price or cost of doing so

9 Maintenance risk The risk of maintaining the asset to the appropriate standards and specifications for the life of the project

10 Inflation risk The risk of inflation eroding the real cost and rate of return of the project


The PPP risks that are covered11 Political risk The risk of government intervention, discrimination, seizure or expropriation

of the project

12 Regulatory/change in law risk

The risk of law changing and affecting the ability of the project to perform and

the price at which compliance with law can bemaintained

13 Resource or input/demand risk

The availability by both volume and quality along with transportation of

resource or inputs to a project or the demand for the product of service of a project by consumers/ users

14 Early termination

(including any compensation) risk

The risk of a project being terminated before the expiry of time and the monetary consequences of such termination

15 Strategic risk The risk of change in shareholding of the private partner or internal conflicts of interest within the shareholders

16 Construction risk The risk of labour dispute, interface/project management, commissioning,

intellectual property infringement, defects, quality assurance, subcontractor disputes and cost overruns where no relief event applies

17 Disruptive technology risk

The risk that a new emerging technology unexpectedly displaces an established technology used in that sector


What is not covered– The Report has its limitations. The risks identified in the Report focus on the risks that can be

legislated, allocated and mitigated between the public and private sectors and are risks addressed primarily through the concession or project agreement.

– The parties are exposed to other risks that they should not ignore or discount such as:

• Government procurement risk

• Private sector financial and performance risk

• Third party intervention/ delay


Screenshots


Comparison of specific risks across sectorsIllustrative example 1 – Land purchase and site risk

– Land rights and ground conditions in developed markets are typically more established and risks

can be mitigated with appropriate due diligence with relevant land registries and utility records.

– Similarly, the Private Partner’s obligations with regards to indigenous rights are generally better

legislated in developed markets.

Light rail project

Developed markets

Risk is principally with the Contracting Authority although it may be

shared where the suitability of the corridor is dependent on the Private

Partner’s design solution; and also where the site can’t be fully surveyed prior to award (e.g. existing utilities in high density urban areas).

Shared risk

Emerging

markets (e.g. Nigeria)

Contracting Authority will need to provide a “clean site” and hold the risk

of unforeseeable ground conditions.

Public Risk


Water desalination project

Developed markets

In a Developed market, the risk is principally with the Contracting

Authority to ensure the required land interests in the site designated for

the Project are available. Land interests are usually in form of lease with

Contracting Authority responsible for pre-existing contamination,

substructures etc. However, private partner will need to be required to

undertake baseline surveys and satisfy itself as to any existing assets

proposed to be used in the Project. Contracting Authority may use

legislative powers to acquire site.

Shared risk

Emerging markets

The position is similar in an emerging market. Shared Risk

Solar PV project

Developed

markets (e.g. Thailand)

In a Developed market, the Private Partner bears full responsibility for the

suitability of the site, including geological, geotechnical, and

archaeological conditions. The Private Partner is required to obtain the

peaceful use and possession of the site and all requisite access rights.

Unless the Project requires a transmission line to be constructed,

Contracting Authority has no obligations in relation to assisting with

securing the site (including permits/consents etc)

Private risk

Emerging

markets (e.g. South Africa)

The position is similar in an emerging market. Private risk


Comparison of specific risks across sectorsIllustrative example 2 – Resource/input risk• This is the risk that the supply of inputs or resources required for the operation of the project are

interrupted or the cost increases.

• Developed markets generally do not experience market volatility to the same extent as emerging

markets, and resource availability is less of a concern. Where there is reliance on locally sourced

materials, Contracting Authority may share some of the risk (e.g. political actions).

• Where the Private Partner bears the risk, it will seek to pass it through to its contractors.

Toll road project

Developed markets

Private Partner bears principal risk to ensure an uninterrupted supply of

inputs/resources and managing the costs of those inputs. In toll roads,

this is especially relevant to winter road clearance.

Private risk

Emerging markets

Similar to developed market, but the Contracting Authority may share this

risk where there is a reliance on local source materials given prospect of

labour disputes, embargos etc.

Private Risk


Water distribution project

Developed markets

Main input is water and this is generally within ownership or control of

Contracting Authority, so it bears the risk of quantity and quality at the

delivery point. Contracting Authority also bears risk for power for pumping

and the price is a pass-through cost. For other resources required to

operate the Project, the Private Partner would be responsible.

Shared risk

Emerging markets

Similar to developed market, such that time and cost risk for water and

power is retained by Contracting Authority, otherwise other risks are

borne by Private Partner and passed onto contractors.

Shared Risk

Power transmission project

Developed markets

Private Partner bears principal risk to ensure an uninterrupted supply of

inputs/resources and managing the costs of those inputsPrivate risk

Emerging markets

Similar to developed market, but the Contracting Authority may share this

risk where there is a reliance on local source materials given prospect of

labour disputes, embargos etc. In such a case, the Contracting Authority

may need to stand behind the cost of the input, or at least underwrite the

Private Partner’s financing for these costs.

Shared risk


Comparison of specific risks across sectorsIllustrative example 3 – Disruptive technology risk• Disruptive technology risk is the risk that a new or emerging technology unexpectedly displaces an

established technology used in that sector. Such technological changes can cause significant

disruption to a project over the term of the concession. For example, in an airport, technology is likely

to reduce “dwell time” at airports which lead to less spending and revenue for the airport. Driverless

cars will reduce parking revenue and increased in digital communications may reduce business travel.

• This risk is not always expressly address in project documentation. In a PPP, there is often a tension

between “continuous improvement” obligations and variations. There may be an obligation on Private

Partners to perform service which seeks for continuous improvement for minor changes. However, for

major changes, these would require a variation.

Heavy rail project

Developed markets

Not usually addressed as unlikely to be considered a “thread” to the

infrastructure. Technological change will mostly reduce cost and increase

efficiency

N/A

Emerging markets

This risk is unlikely to be passed to the Private Partner in an emerging

markets ROT project where technology is unlikely to be a major

component of the project.

Public Risk


Waste project

Developed and

emerging markets

The technology is neutral in this matrix as there is such a variety of waste

to energy solution from incineration to fuel production/gasification and

biogas from waste. Technologies are usually (but international practice

varies) not specified by the procuring entity but do result in different

technological risks for the project.

However, the general position is that the Contracting Authority would bear

the risk of obsolescence.

N/A

Gas distribution project

Developed markets

Gas demand may fall significantly due to rapid falls in other energy

prices, gas price increase (eg carbon tax), or new pipeline technology

makes existing tariff uneconomic (eg use of plastic piping). Contracting

Authority will generally take the risks associated with reductions in gas

demand due to technology affecting the customers or gas suppliers. In

developed markets, the process of gas being distributed has already

been disrupted by rise of solar pv generation. The regulatory reset

process allows the Contracting Authority and Private Pattern to assess

the impact of disruptive technology and how such advances can be

addressed in the structure and rate of the tariff.

Public risk

Emerging markets

Similar to developed market. The disruptive technology may enable the

operator to employ new technologies and reduce operating costs. In

emerging markets though, this risk is not typically addressed in the

project documents. Given the delays in project implementation in

emerging markets, arguable the risk of disruptive technology is higher

than in Developed markets.

Public risk


Risk mitigation measure and government support

arrangement

Distinction between contractual risks and other risks

such as technical or procurement risk which may

influence the bankability of a project

In the Report, for those contractual risks, we have

sought to provide annotated commentary on the

mitigation measures and government support

arrangements that can be incorporated into the project

documents

While the allocation of the risk is important for the

reader, we expect that the most useful information will

be the practical steps and measures that a Contracting

Authority can undertake to mitigate and manage such

risk


Consultative Process of the Report

Draft versions of the Report were discussed at two international workshops:

The first in conjunction of the meetings of the G20 Investment and Infrastructure Working Group (IIWG) on 25 April 2016 in Singapore with approximately 75 participants including government representatives and project developers, lenders and transaction advisors

The second hosted by the OECD on 31 May 2016 in Paris with approximately 40 participants again including government representatives and private sector stakeholders

The Report was also discussed:

At the final meeting of the IIWG in Bali on 2 June 2016

At the PPP Americas Conference in June 2016

The published version of the Report, reflecting comments made during the workshops and IIWG meetings was released on 10 June 2016


• The Report was welcomed by the G20 Finance Ministers and Governors at their meeting in

Chengdu on 23-24 July 2016

• Shortlisted for the 2017 Financial Times Asia-Pacific Innovative Lawyers Awards

• China PPP Centre has translated into Chinese, to disseminate to regional and municipal PPP

units

• Inter-American Development Bank translated into Spanish to utilise in selected Latin American

countries (strong usage already in Brazil and Peru)

• The GI Hub also working with the MDBs’ Global Infrastructure Facility to use the tool on future

GIF pilot projects

Dissemination so far


GI Hub/NRF Regional Workshops

Sponsored regional interactive 1 day workshops on the PPP Risk Allocation Tool

The workshops will cover:

Key risk allocation issues

Tailored for specific sample projects

How to use the PPP Risk Allocation Tool

Regional workshops planned for 2017 in:

Bangkok, Thailand

Nairobi, Kenya

Santiago, Chile


Thank you to our partners and funders

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