Force majeure risk

Power transmission Power transmission

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 entitles the Private Partner to relief.

Typical events include (i) war, armed conflict, terrorism or acts of foreign enemies; (ii) nuclear or radioactive contamination; (iii) chemical or biological contamination; or (iv) pressure waves caused by devices traveling at supersonic speeds.

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 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.

The Private Partner's relief in respect of force majeure events occurring during operation will, in most instances, include relief from KPI penalties.

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 may 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).

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

Generally speaking, where performance is suspended or materially impacted during an event of force majeure, an amount of compensation should continue to be payable by the Contracting Authority to the Private Partner in order to service the Private Partner's debt obligations during the course of the event. Where the project is terminated, the Contracting Authority may be required to fully compensate the Private Partner for debt owed to the lenders. Whether the debt will be kept whole in such a scenario, will be a key area of focus for prospective lenders as part of their initial credit assessments.

Comparison with Developed Market

In emerging market transactions, the Contracting Authority may not provide any compensation for termination arising from a 'natural' force majeure, on the grounds that this should be insured. If this is the case then unavailability of insurance will need to be adequately addressed.

Other markets may provide limited cover to compensate senior debt.

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

Typical events include (i) war, armed conflict, terrorism or acts of foreign enemies; (ii) nuclear or radioactive contamination; (iii) chemical or biological contamination; or (iv) pressure waves caused by devices traveling at supersonic speeds.

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 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.

The Private Partner's relief in respect of force majeure events occurring during operation will, in most instances, include relief from KPI penalties.

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 may 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).

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

Generally speaking, where performance is suspended or materially impacted during an event of force majeure, an amount of compensation should continue to be payable by the Contracting Authority to the Private Partner in order to service the Private Partner's debt obligations during the course of the event. Where the project is terminated, the Contracting Authority may be required to fully compensate the Private Partner for debt owed to the lenders. Whether the debt will be kept whole in such a scenario, will be a key area of focus for prospective lenders as part of their initial credit assessments.

Comparison with Developed Market

In 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 force majeure.

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