Exchange and interest rate risk

Natural gas distribution Natural gas distribution

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 Contracting Authority would specifically prohibit the Private Partner from claiming additional costs for general currency and interest rate fluctuations.

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

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

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

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.

Comparison with Emerging Market

In developed markets, the risk of currency fluctuations and interest rates can usually be hedged at reasonable rates and is a risk that is best borne by the Private Partner.

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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 Contracting Authority would specifically prohibit the Private Partner from claiming additional costs for general currency and interest rate fluctuations, although certain elements of the tariff may be adjusted for fluctuations between the local currency and relevant foreign currencies. In particular it is common practice to index a portion of operating costs to movements in foreign currencies.

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

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

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

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

As the gas tariffs will usually be paid in local currency, the Contracting Authority may 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 markets, the risk of currency fluctuations is often a key bankability issue. Issues of convertibility of currency and restrictions on the repatriation of funds are also bankability issues, especially upon termination.

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