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

In a Dutch project the Private Partner could also enter into new Financing Agreements (subject to certain conditions) and the Contracting Authority would also be able to request the Private Partner to investigate the possibilities for refinancing if the market in general is in a position to offer more favourable conditions.

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.

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

The Contracting Authority is not expected to assist the Private Partner in mitigating such risks.

However in some circumstances the Contracting Authority may seek to retain interest rate risk if it feels it can bear the risk more efficiently than the private sector.

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 fare adjustments, but the ability to do this may be limited as light rail projects tend to be highly demand elastic (i.e. fares go up and ridership goes down).

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

As fares 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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