Exchange and interest rate risk

Heavy rail Heavy rail

Description (What is the Risk)

The risk of currency fluctuations and or the interest rate over the life of a project.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Network Rail takes interest rate risk but exchange rate risk should not apply. Network Rail receives its Government funding in 5 year blocks called control periods.

Manufacturers take interest rate risk (they may seek to enter into hedging arrangements). They may seek to avoid exchange rate risk either side of a specified contract date, but Manufacturers usually accept this as a business risk.

Mitigation Measures (What can be done to minimize the risk)

Exchange and interest rates risks are typically not addressed directly.

Government Support Arrangements (What other government measures may be needed to be taken)

The Contracting Authority is not expected to assist Network Rail or the Manufacturer in mitigating such risks.

Comparison with Emerging Market

In developed markets, the risk of currency fluctuations and interest rates is not substantial enough to require the Contracting Authority to provide support.

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Description (What is the Risk)

The risk of currency fluctuations and/or the interest rate over the life of a project.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner would look to mitigate this risk through hedging arrangements under the Finance Documents, to the extent possible in that market.

In certain countries this may not be possible due to exchange / interest rate volatility.

Mitigation Measures (What can be done to minimize the risk)

Some of the cost risk can be managed on demand-risk projects by passing the risk through to the user by way of tariff adjustments, but the ability to do this may be limited as existing rail ROT projects tend to be highly demand elastic (i.e. tariffs go up and demand goes down).

Government Support Arrangements (What other government measures may be needed to be taken)

As tariffs will be collected in local currency the Contracting Authority may need to retain the risk of devaluation of the local currency to the extent that such devaluation impacts on the economic viability of the project (due to the need to pay for foreign currency imports and service foreign currency debt).

Comparison with Developed Market

In emerging market rail projects, the devaluation of local currency beyond a certain threshold may be a trigger for non-default termination. Alternatively it could trigger a 'cap and collar' subsidy arrangement from the Contracting Authority. Issues of convertibility of currency and restrictions on repatriation of funds are also bankability issues upon termination in emerging markets.

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