11. Risk Identification & Mitigation

Risk

Examples

Mitigation

Construction risk

• Construction overruns add significant cost to the total capital sum requiring additional funding exposure.
• Time delays in completing and commissioning the scheme add significant cost to the capital sum and negatively impact on water users on-farm developments.

• Research the background and financial strength of the construction company. Can they manage a contract of this capacity and absorb cost overruns if necessary.
• Enter into fixed term, fixed price contracts with construction companies
• Ensure strong penalty clauses or cost sharing arrangements are included within contracts for time delays and cost overruns
• Consider risk transfer to DBO or BOOT provider

Environmental risk

(Supply risk)

• New conditions attached to resource consent impacting on access to long-term water supply putting the scheme in jeopardy.
• Significant additional cost incurred to rectify environmental damage caused by the scheme.

• Ensure the scheme is always operated within the conditions of the resource consent.
• Obtain insurance where possible to protect against large-scale environmental damage.
• Consider risk transfer to DBO or BOOT provider

Take-up risk

• Water users are slow to purchase rights to the scheme (waiting to see if it works first) making the scheme uneconomic for those users who have committed early.
• Commitment is made but on-farm development is slow (capital constrained) impacting on a water users ability to meet charges.

• Fully investigate the opportunities for staging the development to meet demand.
• Ensure minimum commitment has been received from water users in the area prior to approaching a financier.
• Negotiate with local and/or Central Government to secure revenue-underwriting support for the scheme.
• Structure company in such a way that it is attractive for private investment lowering the requirement for water user equity.

Operating risk

• Operating costs exceed financial forecasts making water uneconomic for water users to purchase.

• Fix as many operating risks as possible to provide certainty i.e. fixed funding, electricity hedging environmental damage.
• Consider risk transfer to DBO or BOOT provider.

Major maintenance risk (including natural disaster)

• Scheme requires major unscheduled maintenance, imposing a significant cost on the scheme to be funded by water users.

• Obtain insurance where possible to protect against large-scale maintenance and damage including loss of profits.
• Consider risk transfer to DBO or BOOT provider

Climatic risks

• Scheme generates no revenue from water users during very dry or very wet seasons, meaning revenue does not cover fixed costs.

• Ensure water-user sign long-term take or pay contracts to cover fixed operating costs.

Commodity market risk

• Commodity prices fall significantly reducing farm incomes to the point where users cannot meet water charges.

• Provide research on commodity fluctuations and ensure that financial feasibility of the scheme is still valid given the expected fluctuations in commodity prices.

Water trading risk

• Uncontrolled water trading forces the price of water rights to excessive amounts impacting on a new users ability to pay scheme water charges.

• Formal water trading markets allow market forces to dictate the price for water and help to ensure that water is used most efficiently.

Political risk

• Changes in legislation or regulation directly impacting on the scheme viability or on water user economics i.e. conditions imposed under the Kyoto Protocol

• This is normal business risk

Public liability risk

• Scheme pipe or dam bursts flooding houses, damaging property and crops. Scheme is sued for significant sum for damages

• Obtain insurance where possible to protect against large-scale maintenance and damage including loss of profits.
• Consider risk transfer to DBO or BOOT provider

Ownership structure risk

• Scheme is structured as a Co-operative Company. Certain commodity prices fall, and therefore these users do not take water for a period. These users apply under legislation to have the company repurchase shares to remove any take or pay commitment impacting the financial viability of the remaining shareholders.

• Ensure the ownership structure is the most appropriate for both debt and equity funding providers, with shares classes protecting investor objectives.

Bankruptcy risk

• Corporate landowners enter long-term supply agreements, but go bankrupt when yields are low leaving the scheme limited recourse for recovery.

• This is normal business risk
• Scheme needs to be aware of any concentrations of credit risk with an individual property and manage these customers appropriately.