Commercial Risks Mitigation

Common commercial risks are cost overruns, time delays, failed procurement or unavailability of financing. Contractual arrangements, insurance and guarantees are the main tools used by project sponsors and investors in Southeast Asia to mitigate these risks.

Our findings are based on interviews and a survey on Project Risks and Risk Mitigation which targeted public and private stakeholders engaged in PPP projects in Southeast Asia.

 

Construction Risk Mitigation

Construction risks might include time delays, performance risk and cost overruns. Contractual arrangements, insurance and performance bonds/warranties are the most effective instruments for mitigating this type of risk. Lenders might seek to further reduce risks by collaborating with experienced construction companies and project sponsors.

Demand Risk Mitigation

Demand risk (i.e. the risk that forecasted demand may not meet actual consumer demand) can present a major constrain for accessing funding, as a predictable and safe revenue stream is a prerequisite for financially viable and bankable projects. Project sponsors and lenders are often reluctant to bear demand risk, especially in markets with a limited track record of successful PPP projects. Availability payments and minimum traffic/revenue guarantees have been reported as the most effective instruments for reducing demand risk.

Exchange Rate Risk Mitigation

Exchange rate risk is of increased importance in infrastructure projects where revenue streams and debt services occur in different currencies. Contractual arrangements, followed by hard tariffs paid in hard currency and matching payment, have been reported as the most effective instruments to reduce this type of risk.

Operational and Supply Risk Mitigation

Operational risks relate to a project’s inability to run at the desired level of efficiency in service delivery, or at higher than expected maintenance costs. Supply risk refers to constrained access to inputs for operating the facility. Contractual agreements and public support have been reported as the most effective instruments for reducing operational and supply risks.

Main commercial risks and selected financial risk mitigation instruments
Type of Risk Risk Mitigation Instruments Providers
Construction Risks Fixed costs/fixed date (turnkey) contracts Construction companies
Time delays Delays in start-up (DSU) insurance (caused by property damage) Private insurers
Cost overruns Derivatives to hedge against input price spikes Financial markets
Performance risks Bank guarantees
Performance bonds/surety/subcontractor insurance
Warranties
Banks
Private and public insurers
Suppliers
Property damage Construction-all-risk insurance Private insurers
Damage of equipment during transport Marine Cargo insurance
Marine Cargo Delay in Start-up
Private insurers
Third party insurance claims Third party liability insurance Private insurers
Demand Risks   Off-take agreements
Availability payments, Take-or-pay contracts
Minimum revenue guarantees
Off-taker
Government
Exchange Rate Risks   Derivatives (i.e. futures)
Contractual agreements (linking tariffs with FX)
Financial markets
Off-taker / Government
Operational Risks   Service contracts with Key Performance Indicators (KPI)
Property damage insurance
Service providers
Private insurers
Supply (Price) Risks   Derivatives (i.e. futures)
Put-or-Pay contract
Pass-Through contract
Financial markets
Suppliers
Off-taker
Non-Payment by Private Obligor   Credit insurance
Comprehensive cover (commercial & political risks)
Private insurers