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 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 (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 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.
| 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 |