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Managing risk in major infrastructure

developments

Presented by

Peter Block Partner, Minter Ellison August 2014

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• What is risk?

• Risk identification

• Risk allocation

Risk management in use from conception to realisation

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• Drafting of the Contract

• Administration of the Contract

• Optimism Bias

• Black Swan Events

Some key risks which cause Project failure/reduction in return

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• Drafting of the Contract (Document Production)

• What?

• Errors in drafting

• Disharmony between documents

• Why?

• Never enough time

• Commodity

• The last job – next slide

• The structure – later slide

• The production process – later slide

Drafting of the Contract (1)

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Drafting of the Contract (2) The last job - The mutating contract

Generation A

Generation B

Current Contract

Another ‘Beginning’

Mutation

Mutation

Mutation

The ‘Beginning’

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Post Contract Behaviour Common Law Statute Post Tender

Correspondence Referenced Documents

Annexures to the Contract

Conditions of

Contract

Annexures

Referenced Documents

Post Tender Documents

Statute (Wrongs Act)

Common Law

Post Contract Behaviour

Decreasing Visibility

Drafting of the Contract (3) The Structure - The opaque contract

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The Contract

The Lawyers

Financial Advisors

Document 6

Document 5

Technical Advisors

Document 2

Document 1

Client

Document 4

Document 3

Component 1

Component 2

Component 3

Component 4

Component 5

Component 6

Output

Drafting 1

Drafting 2

Drafting 3

Drafting of the Contract (4) The production process - Document Complexity

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• Administration of the Contract

• What is administered?

• How is it administered

Administration of the Contract

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Administration of the Contract - The virtual contract

The Actual Contract

Experience

Administrative Documents

Understanding of the Contract

The Virtual Contract

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Project Conception

Documentation

Delivery

Administration of the Contract - The relay race

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• Optimism Bias

• causes a person to believe that they are less at risk of experiencing a negative event compared to others

• Natural Wiring

• Difficult to resist

• Formal Study

Optimism Bias

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• Black Swan Event

• Random

• Improbable

• High Impact

• Overlooked

• Difficult to neutralise

Black Swan Events

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Demand management and risk – the failure of the economic infrastructure model?

• Perception is that the successful bidder is the one who made the biggest mistake on demand risk and project costs

• Private sector has been donating infrastructure to citizens of the relevant State

• Very successful from State’s viewpoint

• Decreased appetite remains for patronage/demand risk economic infrastructure deals

• Using availability style techniques for demand risk deals – value for money?

• State needs economic infrastructure procurement as a policy tool to deliver infrastructure

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Possible Solutions (Partial) to Sharing Demand Risk

• Nothing is new in procurement

• Return to long ignored vanilla techniques

• Most involve Government taking some of the demand risk driven by VFM considerations

• Government guarantee

• Take or pay/cap and collar to protect one or more of

• revenue/vehicle numbers

• debt only – DSCR/LLCR trigger

• equity

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Questions

• Questions?

Peter Block – Minter Ellison

Partner – Projects and Infrastructure

peter.block@minterellison.com

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