Risk Allocation and Mitigation on operation and maintenance of water supply distribution systemTentative Assessment

No. Risk type Most Period of impacted incidence parties (Note 1) Uncertain conditions Provider needs extra Provider Operation of existing assets costs for repair and for replacement (if contract includes fixed price for replacement Leakage due to poor Impact on Provider's Provider conditions of existing profit margin if its pipes payment is linked to volume of water sold to end users Provider does not maintain assets in good conditions WSD get back poor WSD condition assets upon contract expiry Operation Risk item description Consequence Probabili ty: High/ medium/ low M Impact: Preferred High/ allocation medium / low H Provider under a concession, or WSD under an O&M contract or Lease H Provider Risk managing strategy: Avoid/ minimise/ transfer/ allocation (Note 2) Provider to minimise by expert investigation and obtaining detailed asset information from WSD

Annex 5

Commercial principle/ contractual terms between WSD & Provider (Note 3) Provider needs to factor in the repair cost in the pricing and the cost of replacement if contract stipulates fixed price for all replacement/ rehabilitation

Asset

Asset

Provider needs to factor in the nonProvider to minimise revenue water in the pricing through inspection of assets and thorough analysis of data on non revenue water WSD to avoid through Contract provides for renewal at end appropriate end-of-term of contract, and allows WSD to arrangement on assets recover costs from Provider for repairing and maintaining assets not in specified conditions. This will discourage Provider to run down assets towards end of contract Provider to minimise through obtaining information on the Asset Management Plan For O&M contracts and leases, WSD will finance extra capital investments. For concession, Provider will finance the investment

Asset

Decommissi L oning

Provider

Asset

Aged trunk mains Major capital require rehabilitation investment required

Provider Operation and WSD

WSD or Provider

Contract variation Changes in service requirements by WSD

Provider May require additional service capacity, new technology or process, which will call for additional capital investment or operating costs

Operation

Shared

Contract provides for cost pass WSD to minimise through better planning, through, contract renegotiation or and adopting outcome retendering specifications.

PPP for water supply and distribution systems in Kowloon and Sha Tin

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Risk Allocation and Mitigation on operation and maintenance of water supply distribution systemTentative Assessment
No. Risk type Risk item description Consequence Most Period of impacted incidence parties (Note 1) Provider Operation Probabili ty: High/ medium/ low L Impact: Preferred High/ allocation medium / low H Provider Risk managing strategy: Avoid/ minimise/ transfer/ allocation (Note 2) Provider to mitigate through proper insurance arrangements

Annex 5

Commercial principle/ contractual terms between WSD & Provider (Note 3) Contract require indemnity from the Provider

Environmental incidents

Liability to affected Damage of third party party's property or disturbance/causing loss to third party due to flooding or suspension of water service

Force majeure

Suspension of water Consumer Operation Emergency or s and unforeseeable events supply Provider caused by reasons of force majeure that prevent normal operation of the water supply & distribution systems

Shared

Minimise through contingency plans and insurance

Provider will not be subject to default regime provided that remedial steps are taken within an agreed timeframe. Provider will not be paid during Force Majeure when water supply is suspended.

Force majeure

Unforeseeable events caused by reasons of force majeure that significantly damage the water supply & distribution systems

Suspension of water Consumer Operation supply and additional s and Provider capital costs to rehabilitate the system

Provider or WSD

Minimise through contingency plans and insurance

Provider will not be subject to default regime and will not be paid during Force Majeure when water supply is suspended. For For O&M contracts and leases, WSD will finance extra capital investments. For concession, Provider will finance the investment

Input

Changes in costs of treated water from WSD operated treatment works

Provider's profit margin reduces

Provider

Operation

WSD

WSD to minimise through long term contracts on inputs for treatment process

Contract fixes price on treated water from WSD

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Risk Allocation and Mitigation on operation and maintenance of water supply distribution systemTentative Assessment
No. Risk type Risk item description Consequence Most Period of impacted incidence parties (Note 1) Provider Operation Probabili ty: High/ medium/ low M Impact: Preferred High/ allocation medium / low M Provider Risk managing strategy: Avoid/ minimise/ transfer/ allocation (Note 2) Provider to minimise through factoring future cost increase into tariffs, and through setting up long term supply contracts WSD to minimise through back up arrangements among different treatment works it operates

Annex 5

Commercial principle/ contractual terms between WSD & Provider (Note 3) In general Provider will bear risk of cost increase. Contract clause to allow efficiency gain to be shared with WSD in input costs decrease

10 Input

Cost variation of inputs (other than water) due to reasons other than inflation

Provider cannot recover operating cost if costs increase, or WSD cannot benefit due to cost reduction Provider cannot meet performance standards on water availability

11 Input

Insufficient output of treated water from WSD operated treatment works to meet demand of supply zones (for reasons other than force majeure) Technical failure of equipment due to poor maintenance

Provider Operation and consumer s

WSD

Provider will not be subject to payment deduction for service failure due to such reasons

12 Maintenance

Suspension of service due to technical failure

Provider Operation and WSD

Provider

Provider to transfer risk to contractor through long term maintenance contracts. WSD to minimise through monitoring provision WSD/Provider to minimise by requiring Provider to implement a comprehensive asset management plan

Provider will secure performance bonds and warranties from contractors, which will last for a few years after completion. After that, repair risk will be borne by Provider.

13 Maintenance

Provider fails to maintain/replace pipes properly, resulting in deterioration of pipes

Increased incidence of mains burst or leakages, leading to suspension of service

Operation WSD, consumer s, the public

Provider under a Concession, or WSD under O&M contract or Lease

Standards of maintenance specified in the contract. Contract will provide for WSD's right in monitoring. For long term contracts, fixed payment on routine maintenance so that Provider will bear consequences for poor maintenance.

PPP for water supply and distribution systems in Kowloon and Sha Tin

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Risk Allocation and Mitigation on operation and maintenance of water supply distribution systemTentative Assessment
No. Risk type Most Period of impacted incidence parties (Note 1) Impact on Provider's Provider Operation Addition or loss of significant number of costs, if customer services are part of water accounts or the service scope; as large commercial customers within the well as revenues, if payment is linked supply zones with volume of water supplied New infrastructure required to supply newly developed areas New connections required for new property developments Contamination of the water supply and distribution systems Additional capital investment required Provider Operation and WSD Risk item description Consequence Probabili ty: High/ medium/ low L Impact: Preferred High/ allocation medium / low H Provider or Shared Risk managing strategy: Avoid/ minimise/ transfer/ allocation (Note 2)

Annex 5

Commercial principle/ contractual terms between WSD & Provider (Note 3) Contract provides mechanism for cost pass through.

14 Market/ volume

15 Market/ volume

WSD or Provider

WSD and Provider to mitigate through obtaining latest land planning information

For O&M contracts and leases, WSD will finance extra capital investments. For concession, Provider will finance the investment Contract provides mechanism for cost pass through for extra services

16 Market/ volume

Additional capital investment required

Provider

Operation

Shared

17 Performance

Health and safety hazards

WSD, Operation consumer s

Provider

Contract specifies this as a Provider to minimise through strict adherence performance indicator, and specifies Provider's responsibility and liability. to operation and maintenance guidelines and close monitoring

18 Performance

Treated water from WSD operated plants fails to meet required quality

Provider cannot meet Provider performance standards on water quality

Operation

WSD

WSD to minimise through proper monitoring of its own treatment process

Contract specifies quality of treated water supplied from WSD, and liability of WSD. Provider will not be subject to payment deduction if it fails to meet water quality standards for such reason.

PPP for water supply and distribution systems in Kowloon and Sha Tin

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Risk Allocation and Mitigation on operation and maintenance of water supply distribution systemTentative Assessment
No. Risk type Risk item description Consequence Most Period of impacted incidence parties (Note 1) WSD, Operation consumer s Probabili ty: High/ medium/ low L Impact: Preferred High/ allocation medium / low H Provider Risk managing strategy: Avoid/ minimise/ transfer/ allocation (Note 2) WSD to minimise through monitoring provisions

Annex 5

Commercial principle/ contractual terms between WSD & Provider (Note 3) Minimum water pressure and water level at service reservours specified in the contract. Failure to meet standards will constitute default. Provider needs to provide performance bonds. Contract will provide for WSD's right in monitoring.

19 Performance

Water not available Shortage of water at consumer end, eg supply due to insufficient water pressure

20 Performance

Dispute over volume/quality of treated water supplied by WSD operated treatment works, and volume/quality of water at consumer ends Changes in service requirements due to regulatory changes initiated by WSD as a water authority

Affects performance Provider and payment of Provider

Operation

Shared

Avoid through specifying Contract specifies the way to measure ways of measurement volume/quality of water, incl. instrument type, method of measurement, calibration requirements, and ways to resolve disputes over measurement

21 Regulatory

Provider May require additional service capacity, new technology or process, which will call for additional capital investment or operating costs Provider

Operation

WSD

WSD to inform Provider Contract provides for cost pass through, contract renegotiation or of any planned retendering regulatory changes

22 Regulatory

May result in higher General regulatory capital or operating changes (incl. tax) applicable in general costs to most businesses

Operation

Provider

Provider should factor in Tariff payment will not be adjusted such changes in their even if regulatory changes result in price estimation higher costs

PPP for water supply and distribution systems in Kowloon and Sha Tin

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Risk Allocation and Mitigation on operation and maintenance of water supply distribution systemTentative Assessment
No. Risk type Risk item description Consequence Most Period of impacted incidence parties (Note 1) WSD and Operation consumer s Probabili ty: High/ medium/ low L Impact: Preferred High/ allocation medium / low M Provider Risk managing strategy: Avoid/ minimise/ transfer/ allocation (Note 2) Provider to minimise through applying for permits/licences in advance

Annex 5

Commercial principle/ contractual terms between WSD & Provider (Note 3) Contractor will be subject to payment deduction under such circumstances

23 Regulatory

Provider fails to Failure or delay in deliver required obtaining permits/ licences for certain service in time activities (eg digging up roads) or for operating certain equipment Extra maintenance Unstable ground costs conditions that damage underground pipeworks

24 Site

Provider

Operation

Provider

Provider to minimise by Provider prices in the extra expert investigation and maintenance costs due to ground movement detailed information from WSD

Note: 1 In general, WSD and consumers will be impacted by delay of service commencement; while Provider will be impacted due to possible payment reduction or abatement, or even termination 2 Avoid -Avoid or ensure conditions that eliminate certain risks Minimise -Minimise by reducing the likelihood or severity of certain risks Transfer -Transfer of unavoidable risks to a third party to carry the risk Allocate -Accept and allocate the remaining risks to the party most able to carry it at the lowest overall cost 3 Provider means the private party enters into PPP Agreement with WSD on reprovisioning of STWTW

PPP for water supply and distribution systems in Kowloon and Sha Tin

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