Table 6 Mitigation of Design & Development Risk Design and Development Risks What is the How does it What

steps can Who typically bears risk? arise? mitigate the risk? the remaining risks? Design defects Design faults in Provision of The tender adequate insurance owner/developer specification Design contractor Include provisions The design fault in the design contractor once contract requiring liquidated damages the contractor to are exhausted, provide a remedy finance from project or pay lenders is drawn damages(insurance down cover) Construction Risk Cost overrun Within the Provide for cost The construction developers overrun in fixed contractor once control inefficient lumpsum price in liquidated working practices, the construction damages are waste of materials exhausted, standby finance is drawn down. Beyond the Allocate cost The insurer once developers overruns in the insured proceeds control-change in contract; purchase are exhausted; the a law, delay in business investors return obtaining interruption might be eroded approvals or insurance because of timing permits, increased effect. taxes. Delay in complete With in the Require liquidated The contractor ion developers damages from the once liquidated control lack of contractor under damages are coordination of the construction exhausted, stand subcontractors contract. by finance is drawn down. Beyond the developers control-insured force Majeure event. Draw on proceeds from business interruption insurance policy The insurer. Once insurance proceeds are exhausted, standby finance is drawn down. Debt service coverage ratios will be reduced & investors return might be eroded. The project

What step can minimize risks? Check tender specification Monitor design work; replace contractor insurance

Monitor and inspect construction work; provide for early warning mechanism in the contract. Obtain approvals in advance; anticipate problems and allocate risk in contract; use insurance. Monitor and inspect construction work; provide for early warning mechanism in the contract. Rely on insurance.

Failure or delay in

Local municipals

Allocate risks in

Obtain approvals

obtaining permissions consents, approvals

laws

the operating contracts

company, leaser or buyer

Project companys fault

Require liquidated damages payable by project company to the consumers

The project company. There is no effect on other parties until payment of liquidated damages completely erodes shareholders returns, when cash flow may become insufficient and the project coys return is eroded.

where possible; ensure clear division of responsibility in the contract Quantity: ensure security of supply; enter into bulk supply contract. Quality: as per the standards specifications in the market needs.

What is the risk? Increase in bulk supply price Demand

How does it arise? Increase in price or taxes Decreased demand

Revenue risks What steps can mitigate the risk? Allocate risk by contracts Risk depends on precision of feasibility studies

Who typically bears the remaining risks? As allocated by contract; bulk supplier The risk is borne by the developer

What step can minimize risks? Fix price by contract and pass through price increase Ensure exclusivity

What is the risk? Exchange rate

How does it arise? Devaluation of local currency, fluctuation in foreign currencies

Financial risks What steps can mitigate the risk? Include in security package hedging facilities against exchange rate risks such as currency rate swaps, caps and floors Same as above

Interest rate

Fluctuations in

Who typically bears the remaining risks? There is no effect unless hedging facilities are not in place or do not compensate for losses, in which the case the return can be severely reduced. See

What step can minimize risks? Require loans in local currency and same currency as revenue

Negotiate fixed

interest rate

(for hedging facilities against exchange rate risks)

above(exchange rate)

rate loans

What is the risk? Force Majeure

How does it arise? Flood earth quake, riot, strike.

Legal and regulatory

Change in tax law, customs practices and environment std.

Force Majeure Risks What steps can Who typically bears mitigate the the remaining risks? risk? If risk related to The insurer. There an insured event is no effect unless the policy is the event is not called; if not, insured or is stand by finance uninsurable. If the is drawn down insurance policy is exhausted there might be a severe impact on project returns If during the The operating developer/contractor period, adjustment is possible If during the The contractor/ construction standby finance period, draw could be required down standby finance

What step can minimize risks? Use insurance

What is the risk? Uninsured loss or damages to product

How does it arise? Accidental damages

Insurance Risks What steps can mitigate the risk? Insure against all the main risks

Who typically bears the remaining risks? Once standby debt finance is drawn down, the project coys return is reduced

What step can minimize risks? Quantify and allocate risks in advance in the contract