Force majeure risk

Airport Airport

Description (What is the Risk)

The risk that unexpected events occur that are beyond the control of the parties and delay or prevent performance.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Force majeure is a shared risk and there will be a fairly well developed list of events that entitles the Private Partner to relief from performing its obligations.

Typical events include (i) war, armed conflict, terrorism or acts of foreign enemies; (ii) nuclear or radioactive contamination; (iii) chemical or biological contamination; (iv) pressure waves caused by devices traveling at supersonic speeds; or (v) discovery of any species-at-risk, fossils, or historic or archaeological artefacts.

Force majeure events occurring during construction will also cause a delay in completion and therefore revenue commencement. The ability of the Private Partner to bear this risk for uninsured risks will be limited, and the Contracting Authority will typically have to bear the risk after a certain period of time or level of cost has been exceeded.

During operation, the impact of the force majeure may require relief from KPI penalties or an element of temporary reduction or suspension of concession fee payments may be required.

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

Project insurance (physical damage and loss of revenue coverage) is the key mitigant for force majeure risks that cause physical damage.

The risk of disruption as a result of no-fault events could be mitigated by relaxing the performance thresholds (e.g. requiring a lower level of acceptable service, which then allows the Private Partner to take the risk of a certain number of day-to-day adverse events typical to a project of this nature but without incurring performance penalties).

If the effect of the force majeure event is to reduce the revenues of the Private Partner then the amount of the variable concession fee should be rateably reduced. However, it will be a matter of negotiation as to whether any fixed concession fee should continue to be payable in full.

Increased security costs as a result of terrorist events (even in different countries) may also need to be addressed given heightened security concerns.

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

Generally speaking, where parties are unable to agree on a way forward following a force majeure event, after a number of months of continuous force majeure either party should be entitled to terminate the concession contract. If the Contracting Authority does not want the concession contract to be terminated then the Contracting Authority shall pay the Private Partner the actual additional cost of continued operating and an amount of compensation in order to service the Private Partner's debt obligations during the course of the event.

Whether the debt can be fully serviced in such a scenario prior to the possible time for termination, will be a key area of focus for prospective lenders as part of their initial credit assessments.

Where the project is terminated by either party, the Contracting Authority will normally be required to compensate the Private Partner fully for debt owed to the lenders.

The Contracting Authority may also agree to pay compensation to the Private Partner on a 'no fault' basis so that the Private Partner is paid an amount equal to the amount it had invested in the project less any returns it had received in respect of that investment until termination. However, this will be a matter of negotiation on a project by project basis.

Comparison with Emerging Market

On developed market transactions, the Contracting Authority typically compensates the Private Partner, only for its outstanding debt (but not for its expected rate of return) for termination arising from a 'natural' force majeure.

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Description (What is the Risk)

The risk that unexpected events occur that are beyond the control of the parties and delay or prohibit performance.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Force majeure is a shared risk and you would expect to see a fairly well developed list of events that entitle the Private Partner to relief.

Emerging markets typically distinguish between Government and non-Government force majeure with the Contracting Authority assuming more risk for Government force majeure.

In Colombian PPP projects the risk allocation is somewhat different. Force majeure is typically allocated to the Private Partner (with the caveat of the shared risk allocation in cases of International Armed Conflicts, terrorist acts, civil war, coups d'etat, national or regional strikes) which should seek insurance coverage for those insurable events. Additionally, it undertakes the risk of regulatory or constitutional changes that might affect its performance or revenue. Nevertheless, it is important to note that there is a well-established jurisprudence that protects the Private Partner in cases of force majeure when such event produces a breach of the economic equilibrium of the contract. Is a theory that derives from the Rebus Sic Stantibus maxim and which seeks to protect the incentive and economic stability of the Private Partner.

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

Project insurance (physical damage and loss of revenue coverage) is the key mitigant for force majeure risks that cause physical damage.

The risk of disruption as a result of no-fault events could be mitigated by relaxing the performance thresholds (e.g. requiring a lower level of acceptable service, which then allows the Private Partner to take the risk of a certain number of day-to-day adverse events typical to a project of this nature but without incurring performance penalties).

Increased security costs as a result of terrorist events (even in different countries) may also need to be addressed given heightened security concerns.

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

Termination payment for prolonged force majeure may differ depending on the type of force majeure. Lenders will expect to see debt covered by Contracting Authority and/or insurance payments.

Comparison with Developed Market

Termination payment for prolonged force majeure may differ depending on the type of force majeure. Lenders will expect to see debt covered by Contracting Authority and/or insurance payments.

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