A guidebook on public-private partnership in infrastructure

Category 
of risk 
 
Description and 
likely effect 
 
Mitigation measures 
Allocation 
Time 
overrun risk 
Takes longer time to 
complete the project 
− Technical competence and 
experience of EPC contractor and 
subcontractors 
− Retainage, completion bond
− Penalty regime
− Full powers for implementation to IA 
SPV/PP (can pass 
on to EPC 
contractors) 
Input supply 
risk 
Raw materials and 
inputs not supplied in 
time or of less in 
quantity or of low 
quality, price 
escalation of inputs 
− Contractual framework (provision for 
liquidated damages) 
− Secured 
supply 
source 
− Relief may be considered if failure or 
shortage not attributable to any 
private party 
SPV/PP (may pass 
on to input 
suppliers/ 
EPC contractor) 
Operating 
risk 
Factors negatively 
impacting upon 
operation and 
available capacity 
such as, unreliable/ 
untested technology; 
increased cost of 
operation, lower 
capacity; 
nature and cost of 
O&M; inefficient 
operation 
− Proven technology, technology 
transfer 
− Clear 
output 
specification 
− Independent/lender’s 
engineer 
report 
− Guarantee by technology provider, 
EPC contractor 
− O&M 
contract 
− Sinking fund, maintenance reserve 
− Maintenance bond
− Contractual framework (penalty 
regime) 
− Substitution 
right 
SPV/PP/ O&M 
contractor 
Demand/ 
revenue risk 
Insufficient demand 
and/or revenue (due 
to low demand, 
leakage, competing 
facilities, capacity, 
price setting, 
augmentation) 
− Realistic demand studies, sensitivity 
analysis 
− Regular 
monitoring 
− Contractual 
framework 
− Price 
indexation 
− Long term offtake contracts 
− 
Take or pay
SPV/PP; 
Government in 
case of PFI type or 
projects with off-
take agreements 
with government
Change in 
tax rates 
Changes in tax law or 
policy that have 
negative effect on the 
private party, its 
assets, or the project 
− Sensitivity analysis to test the 
robustness of financial return 
− Compensation if such effects are 
discriminatory 
SPV/PP if changes 
were foreseeable 
and not 
discriminatory, 
otherwise 
government 
Repat- 
riation of 
capital and 
profit
Unable to repatriate 
capital or profit, 
currency convertibility 
and transfer
− Partial risk guarantee provided by 
some development banks and ECAs 
− Insurance for political risks (see 
notes at the bottom of the table) 
SPV/PP 
Force 
Majeure 
Natural 
events 
Flood, earthquake, 
cyclone etc; closure 
of operation and 
negative effects on 
assets and project
− Robustness of cash flow 
− Provision of reserves 
− Contractual provisions to withstand 
effect of such periods 
− Relief for short-term close down 
SPV/PP 

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38 
A Guidebook on Public-Private Partnership in Infrastructure
 
 
Category 
of risk 
 
Description and 
likely effect 
 
Mitigation measures 
Allocation 
Force 
Majeure- 
Political 
events 
Change in law, 
expropriation, 
revocation of 
licences, permits etc, 
civil disturbance, war, 
non-default 
termination of 
contract. 
− Insurance for political risks 
− Contractual 
framework 
− Provision of compensation 
SPV/PP 
Dispute 
between 
parties 
Non-compliance of 
contract provisions, 
or difference in 
interpretation of 
provisions 
− Establishment of a contract 
management framework and 
formalization of management 
responsibilities 
− Well defined dispute resolution 
mechanism spelt out in the contract 
− Appropriate 
regulatory 
mechanism 
− Termination of contract 
Government/ 
SPV/PP 
Notes:
EPC = Engineering, Procurement and Construction; IA = Implementation Agency; O&M = Operation and 
Maintenance; PP = Private party in contract with the IA or Government; SPV = Special purpose vehicle.
Government means government in general or the concerned ministry, department or an organ of 
government as the case may be.
The table merely shows some examples of the common risks and their typical mitigation measures that 
may be considered. It does not provide any exhaustive list of risks, their nature or mitigation measures.
Many mitigation measures shown in the third column may also apply to other risks identified in the 
second column.
Although the general principle of allocating risk that the party who is in the best position to manage 
should assume the risk applies to all situations, the party in the best position to manage a particular risk 
may vary from one situation to another. Many risks are project and situation specific. 
A relief event is an incident that temporarily prevents the private company/SPV from completion or 
operation of the project. The private company is not penalized but also does not receive any 
compensation.
Some risks may remain unallocated to any specific party. These residual risks would have to be 
implicitly assumed by the SPV and the lenders. 
Multi-lateral agencies such as Multilateral Investment Guarantee Agency or MIGA of the World Bank 
Group provide loan guarantee for developing country private sector projects. MIGA provides guarantee 
against foreign currency transfer restrictions, expropriation, breach of contract, war and civil disturbance. 
Many other development banks such as the Asian Development Bank, and ECAs have also similar 
mechanisms for providing loan guarantee to private projects.