Exchange and interest rate risk

Water Desalination Water Desalination

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

Currency fluctuations and interest rate fluctuation risks will generally be borne by the Private Partner.

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.

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 generally 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 Contracting Authority would specifically prohibit the Private Partner from claiming additional costs in the event of general currency and interest rate fluctuations, although certain elements of the tariff may be adjusted for fluctuations between the local currency and USD (eg in de-pegging scenario).

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.

In certain countries, this may not be possible due to exchange / interest rate volatility or due to the lack of hedging markets for pegged currencies.

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

As the tariff will 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 repatriation of funds are also bankability issues upon termination in emerging markets.

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