Force majeure risk

Natural gas distribution Natural gas distribution

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 there will be a fairly well developed list of events that entitle the Private Partner to relief.

Typical events could include:

- natural force majeure events, which typically can be insured (e.g. lightening, fire, earthquake, tsunami, flood, cyclone, or other natural calamity/act of God, epidemic or plague, accidents or explosions etc), and

- other force majeure events which typically cannot be insured (often described as 'political force majeure' events) (e.g. war within the jurisdiction, strikes / protest, terrorism, riots etc).

The Private Partner will generally be entitled to an extension of time (but sometimes only over an agreed threshold) and additional costs only in the event of a political force majeure, but an extension of time only in the event of a natural force majeure.

Force majeure events occurring during construction will also cause a delay in revenue commencement. The ability of the Private Partner to bear this risk for events of 'political force majeure' 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 the operation period, the impact of the force majeure will depend on whether the force majeure is 'natural' or 'political'. In the event of natural force majeure, the Private Partner would be entitled to the tariff to the extent of its availability. If it is a political force majeure event, the Private Partner would be entitled to the tariff on the basis of the availability of the plant as tested by the last availability test.

Where it is a prolonged force majeure event, the Contracting Authority and/or the Private Partner may have the right to terminate. Whether compensation is payable will depend upon the regulatory regime and the protections under the general laws applicable to sector and investments.

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.

On availability based projects, the risk of disruption as a result of no-fault events could be mitigated by relaxing the performance thresholds (e.g. paying the Private Partner for actual gas availability during the force majeure event and relieving it from any penalties for consequent inability to perform).

Alternatively the project may be subject to abatement but excused from non-performance/breach.

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

If the force majeure event is political there may be support from the Contracting Authority depending upon the regulatory and contractual regime.

Comparison with Emerging Market

In many developed markets the Private Partner and its lenders will rely upon general protections under the law and investment regimes rather than expecting specific regimes protecting it from political risks.

Back to Natural gas distribution

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 there will be a fairly well developed list of events that entitle the Private Partner to relief.

Typical events could include:

- natural force majeure events, which typically can be insured (e.g. lightening, fire, earthquake, tsunami, flood, cyclone, or other natural calamity/act of God, epidemic or plague, accidents or explosions etc), and

- other force majeure events which typically cannot be insured (often described as 'political force majeure' events) (e.g. war within the jurisdiction, strikes / protest, terrorism, riots etc).

The Private Partner will generally be entitled to an extension of time (but sometimes only over an agreed threshold) and additional costs in the event of a force majeure. The relief available may be limited in the event of natural force majeure.

Force majeure events occurring during construction will also cause a delay in revenue commencement. The ability of the Private Partner to bear this risk for events of 'political force majeure' 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 the operation period, the impact of the force majeure will depend on whether the force majeure is 'natural' or 'political'. In the event of natural force majeure, the Private Partner would be entitled to the tariff to the extent of its availability. If the force majeure event is due to an upstream of downstream event the Contracting Authority will usually be required to pay the tariff even if the event is natural force majeure If it is a political force majeure event, the Private Partner would be entitled to the tariff on the basis of the availability of the plant as tested by the last availability test.

Where it is a prolonged force majeure event, the Contracting Authority and/or the Private Partner would generally have the right to terminate. The Private Partner would generally expect to receive more equity return than for termination for a 'natural' force majeure event.

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. It may be possible to insure against upstream or downstream events through 'suppliers extensions' for loss of revenue coverage.

On availability based projects, 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 availability without incurring performance penalties).

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

See comments on the risk of uninsurability for a gas distribution project in emerging markets.

Comparison with Developed Market

Force majeure risks usually sit with the Contracting Authority. In some markets the Contracting Authority will endeavour to allocate these risks to the Private Partner on the grounds that insurance is available.

Back to Natural gas distribution