Exchange and interest rate risk

Port Port

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.

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 by passing the risk through to the port users by way of adjustments to the tariff, but the ability to do this may be limited.

It is therefore common for the Private Partner to look for the right to charge the port tariffs in USD or other hard currency rather than local currency.

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

As revenue may 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) or alternatively provide the necessary dispensations/ approvals to allow tariffs and project accounts to be denominated in hard currency.



Comparison with Developed Market

In emerging market port 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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