18.9.4 Technical Risks
The technical risks associated with the project i.e. in essence the risk that the project
will underperform with respect to original targets is normally covered by guarantees
from the consortium of construction contractors and the equipment suppliers. They
are also normally covered by the operating and performance warranties built into the
Operation and Maintenance Contract.
The completion risk is also an important factor to consider. The risk that the
project, is not completed on time i.e. time overruns occur, and the risk that the
original agreed price is exceeded. i.e. cost overruns occur, are normally protected by
a firm price, firm date, turnkey construction contract with clearly stipulates liquidated damages, also in some cases, further backed by performance bonds.
Moreover, at the initial stage, a contingency factor is included to allow the
contractor to take this risk.
As a back-stop, completion risk is allocated to the project company and eventually by its equity investors, since their equity will be eroded in case of cost overruns
not covered by the Contractors.
It can be argued that as a third back-stop, the lenders should contribute to the
completion risks. However, commercial banks and Export Credit Agencies (E.C.As)
have been very reluctant to do that. As a matter of fact, certain lenders even insist that
the host government guarantee the provisions of subordinated loans to the project
company to ensure debt service smoothness in cases of time and cost overruns.
Finally, some sponsors may agree to provide additional (or stand-by) equity to
cover completion risks.
18.9.5 Financing Risks
Factors which are considered as potential areas of risks in the financing of the project
are:
• Availability of funding
• Delays
• Cost Overruns
• Shortages of Funds
18.9.6 Debt Service Risks
Completion delays or project cost increases have a tremendous bearing on the
availability of funds. In case of project delays and/or project failure the debt service
will be adversely affected. Interests cumulating during construction give rise to a
520
18 Infrastructure Markets and the Private Sector
The technical risks associated with the project i.e. in essence the risk that the project
will underperform with respect to original targets is normally covered by guarantees
from the consortium of construction contractors and the equipment suppliers. They
are also normally covered by the operating and performance warranties built into the
Operation and Maintenance Contract.
The completion risk is also an important factor to consider. The risk that the
project, is not completed on time i.e. time overruns occur, and the risk that the
original agreed price is exceeded. i.e. cost overruns occur, are normally protected by
a firm price, firm date, turnkey construction contract with clearly stipulates liquidated damages, also in some cases, further backed by performance bonds.
Moreover, at the initial stage, a contingency factor is included to allow the
contractor to take this risk.
As a back-stop, completion risk is allocated to the project company and eventually by its equity investors, since their equity will be eroded in case of cost overruns
not covered by the Contractors.
It can be argued that as a third back-stop, the lenders should contribute to the
completion risks. However, commercial banks and Export Credit Agencies (E.C.As)
have been very reluctant to do that. As a matter of fact, certain lenders even insist that
the host government guarantee the provisions of subordinated loans to the project
company to ensure debt service smoothness in cases of time and cost overruns.
Finally, some sponsors may agree to provide additional (or stand-by) equity to
cover completion risks.
18.9.5 Financing Risks
Factors which are considered as potential areas of risks in the financing of the project
are:
• Availability of funding
• Delays
• Cost Overruns
• Shortages of Funds
18.9.6 Debt Service Risks
Completion delays or project cost increases have a tremendous bearing on the
availability of funds. In case of project delays and/or project failure the debt service
will be adversely affected. Interests cumulating during construction give rise to a
520
18 Infrastructure Markets and the Private Sector