Exchange and interest rate risk

Power transmission Power transmission

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.

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 or necessary 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)

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 but currency repatriation guarantees may be sought in some markets.

Comparison with Developed Market

In emerging market 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. Some aspects of local currency payment may also be tied to foreign currency exposure. Many emerging markets will offer limited protection.

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