Page 58 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

As a rule, project risks are borne by the party best able to manage them. Although risk allocation
strategies may vary between projects and countries, risks related to the overall environment within
which the project is implemented are usually borne by the public authorities. These include political
risk (change of government policy, etc.), financial risks (e.g. inflation or currency risks) and legal or
regulatory risks (e.g. changes in law, inefficient legal processes or slow bureaucratic procedures).
However, project-specific risks (e.g. construction, operation and performance risks) are, in theory,
allocated to the private sector. Some risks that are beyond the control of the parties (e.g. demand
and supply risks) could be shared.

Existing potential risks for most projects are listed below.

The legislative framework risks

This refers to risks related to legislature in general, especially urban development-related laws,
fiscal laws and tax laws. Laws should remain consistent throughout a project, in order to mitigate
risk. Any changes in the law that could affect the use, price, terms or contractual framework of an
investment should never be retroactive (affecting things which have already happened), as this
would be perceived by the markets and investors as a sign of weakness and uncertainty. This
could prevent further investments, and may even lead to existing investors seeking compensation
if changes affect ongoing projects. For instance, this could occur if a government introduces new
tariffs on imports of technology, or labour codes with more restrictions, as this would increase
costs and therefore impact the potential returns of a project. Modifying market conditions, such as
introducing higher prices for energy, or changing the use of existing ones (for instance, changing
zoning and development rules), may also negatively impact investment decisions.

Recommendation: ensure that contracts involved in a project clarify the laws on which they are
based.

Construction risks

These include factors which delay or prevent the completion of projects, increase originally
estimated costs, or impose contractual challenges. A strong supply chain, involving experienced
contractors and strong guarantees, may reduce the level of these risks.

Recommendation: it is suggested to clarify the procurement procedure with the general
contractors, and agree on retainers, guarantees, and warrants covering not only the construction
phase but also the minimum period after commencing operations. Avoid contracting construction
companies and resource suppliers specifically created to serve the project.

40 U4SSC: Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects