Risk Category

Description

Consequence

Mitigation

Preferred allocation

Asset ownership

Technical obsolescence

The risk that design life of the facility proves to be shorter than anticipated, accelerating refurbishment expense.

Cost of upgrade.

The private party may have recourse to designer, builder or their insurers.

The private party, but in certain high-technology projects, costs may be anticipated and shared.

Default and termination

The risk of 'loss' of the facility or other assets upon the premature termination of lease or other project contracts upon breach and without adequate payment.

Loss of investment of private party; possible service disruption for government.

The private party (and its debt financiers) will be given cure rights (time and opportunity) to remedy defaults which may lead to termination including under a tripartite deed with financiers. If termination occurs pre-completion government may (but need not) make payment for value in the project on a cost-to-complete basis. If it occurs post-completion, government may negotiate a payment, generally based on fair market value less all amounts due to government. Government will require step-in rights to ensure access and service continuity until ownership/control issues are resolved.

The private party will take the risk of loss of value on termination.

Residual value on transfer to government

The risk that on expiry or earlier termination of the services contract, the asset does not have the value originally estimated by government at which the private party agreed to transfer it to government.

Capital costs incurred to upgrade the asset to the agreed value and useful life or asset demolished or removed.

Government will impose on the private party maintenance and refurbishment obligations, ensure an acceptable maintenance contractor is responsible for the work and commission regular surveys and inspections. It may also direct funds from the project into dedicated controlled sinking fund accounts to accumulate funds sufficient to bring the asset to agreed condition and/or (if required) obtain performance bonds to ensure the liability is satisfied.

Government (to the extent that the private party is unable to fund any required rectification of the asset).