Exchange and interest rate risk

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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 bears all exchange rate and interest rate risk.

The Contracting Authority does not assume any risk in relation to the devaluation of local currency.

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

Exchange and interest rates risks are typically not accounted for beyond the Private Partner's own hedging arrangements.

Comparison with Emerging Market

The tariff is denominated in local currency.

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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 bears all interest rate risk.

The Contracting Authority often assumes the currency risk in relation to the capacity payment, which is often denominated in US dollars.

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

Exchange and interest rates risks are typically not accounted for beyond the Private Partner's own hedging arrangements. Exchange rate risk mitigation can be achieved by having a tariff split into 2 currency components, with a local currency element reflecting the proportion of works the Private Partner can source in-country.

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

The Government may be expected to provide guarantees regarding currency convertibility and ability to repatriate capital and dividends.

Comparison with Developed Market

The tariff is often denominated in US dollars. Sometimes the devaluation of local currency beyond a certain threshold acts as a trigger for non-default termination. Alternatively it could trigger a 'cap and collar' subsidy arrangement from the Contracting Authority.

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