Availability Risk

Availability risk is the performance-based dimension of operating risk in concession contracts. Where demand risk concerns how many people use a service, availability risk concerns whether the concessionaire is delivering the service to the required standard. Both can contribute to operating risk transfer under Directive 2014/23/EU, and many modern European concessions use availability mechanisms as either the sole or primary risk allocation tool.

What is Availability Risk?

In an availability-based concession, the contracting authority makes periodic payments to the concessionaire tied to the asset or service being "available" and performing correctly. Availability is typically defined in the contract through a payment mechanism that deducts from the base unitary charge when performance falls below defined thresholds.

Deductions arise from two main failure modes. Unavailability deductions occur when the asset is physically inaccessible or inoperable: a hospital wing that is closed for emergency repairs, a school building where heating has failed, or a road lane that is shut for maintenance not covered by the planned outage schedule. Performance deductions occur when the asset is technically available but does not meet the specified quality standards: cleanliness failures at a leisure centre, response time failures in a facilities management contract, or deficient lighting levels in a road tunnel.

The key question for concession classification under Directive 2014/23/EU is whether the deduction regime creates genuine financial exposure for the concessionaire. If deductions are trivially small relative to the contract value, or if the authority routinely waives them, operating risk transfer may not be real. If deductions are material, escalating, and robustly enforced, they constitute genuine availability risk sitting with the operator.

Unlike demand risk, availability risk is entirely within the concessionaire's operational control: it arises when the operator fails to deliver, not when users fail to appear. This makes it a more predictable risk category that can be managed through strong asset management, planned maintenance regimes, and service level monitoring systems.

Why availability risk matters for bidders

Availability risk is a core operating performance obligation. Bidders must understand the payment mechanism in detail before pricing a concession: the base unitary charge, the deduction matrix, escalation provisions, and any termination triggers linked to persistent underperformance. A poorly designed deduction matrix can make an otherwise attractive concession financially unviable if the authority applies deductions aggressively in the early operational years when systems are bedding in.

Bidders should also model the interaction between availability risk and their maintenance and lifecycle capex obligations over the concession duration. Deferred maintenance that causes a performance failure five years in can trigger deductions far larger than the maintenance cost avoided. Lenders will scrutinise the maintenance reserve account, the lifecycle replacement schedule, and the sensitivity of project cash flows to sustained availability deductions.

For works concessions with a construction phase, availability risk typically begins only at the end of construction. The period before the asset opens carries different risks (construction cost overrun, delay) that are usually separated from the availability regime in the contract structure.

Example

A UK private finance initiative (PFI) hospital concession pays the NHS Trust a unitary charge of GBP 15 million per year. The payment mechanism deducts from this amount if clinical areas are unavailable (GBP 5,000 per suite per day), if cleanliness standards fail (GBP 500 per zone per failure), or if catering response times exceed targets (GBP 200 per event). In a month where the mechanical and electrical system fails in two surgical suites for four days each, the deduction is GBP 40,000. This is availability risk bearing directly on the concessionaire's operating cash flow.

Frequently Asked Questions

Can a concession transfer availability risk without transferring demand risk?

Yes. Availability-based concessions, common in social infrastructure such as schools, hospitals, courts, and prisons, typically do not involve the concessionaire collecting revenue from end users. The authority pays based on performance, not usage. Provided the deduction regime is genuine and substantial, these arrangements can qualify as concessions under Directive 2014/23/EU, because operating risk transfer can be achieved through availability risk alone.

How is availability typically defined in a concession contract?

Availability definitions vary significantly across European markets and sectors. Common approaches include a percentage of floor area that must be accessible and functioning, a percentage of operating hours during which defined services must be available, or specific output metrics (water quality in a water treatment concession, lane availability on a motorway). The definition must be objective, measurable, and clearly linked to the outputs the authority needs.

What happens if availability risk proves unmanageable?

If persistent unavailability triggers the contract's termination provisions, the concession may be terminated for default. The concessionaire loses future unitary charges and may face a compensation regime that favours the authority. Lenders would typically step in before termination (using step-in rights) to remedy the default and protect their security interest. Understanding the step-in and termination provisions is as important as understanding the deduction matrix when assessing availability risk.