Force majeure risk

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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; (iv) discovery of any species-at-risk, fossils, or historic or archaeological artefacts that require the project to be abandoned or delayed.

In the event the asset is destroyed prior to hand over as a result of force majeure, the Private Partner is obliged to re-build the asset at its own costs, to the extent the risk is insurable.

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 or to establish other methods in order to limit the Private Partner's risk in this regard.

During operation, the impact of the force majeure will depend on whether the project is availability based (where relief from key performance indicator penalties may be required) or is demand-based (where an element of toll subsidy 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.

On an availability based project, the risk of disruption as a result of no-fault events could be mitigated by suspending the performance obligations respectively.

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)

Generally speaking, where parties are unable to agree on a way forward following a force majeure event, 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, it will be a key area of focus for prospective lenders as part of their initial credit assessments as to whether the debt will be kept whole in such a scenario. From a lenders' perspective the termination payment made by the Contracting Authority in respect of the equity will serve as a buffer if the termination payment of the Contracting Authority does not cover 100% of the outstanding debt.

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 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 (eg fire / flooding / storm, vandalism etc), and

- force majeure events which typically cannot be insured (eg strikes / protest, terror threats / hoaxes, emergency services etc.)

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.

During operation, the impact of the force majeure will depend on whether the project is availability based (where relief from key performance indicator penalties may be required) or is demand-based (where an element of fare subsidy 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. Design resilience is also an important mitigating factor for projects with seasonal weather such as monsoon.

On an availability based project, 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 would 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)

See comments on the risk of uninsurability for a toll road project in emerging markets.

Comparison with Developed Market

On emerging market transactions, the Contracting Authority often does not provide any compensation for termination arising from a 'natural' force majeure, on the grounds that this should be insured.

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