Inflation risk

Heavy rail Heavy rail

Description (What is the Risk)

The risk that the costs of the project increase more than expected.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

This risk is taken by Network Rail in relation to infrastructure.

This risk is taken by the Manufacturer in relation to rolling stock, subject to a regime relating to Variations for Mandatory Modifications.

Rolling stock maintenance costs are usually subject to indexation.

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

None, save for indexation.

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

None.

Comparison with Emerging Market

In developed markets, inflation is typically minimal and does not experience fluctuations to the extent of emerging markets.

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Description (What is the Risk)

The risk that the costs of the project increase more than expected.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Inflation risk is typically borne by the project user (on demand-risk projects) or the Contracting Authority (on availability-based projects).

Rail ROT projects in emerging markets are typically demand risk projects which need the ability to increase the user tariff, but this ability may often be restricted (as costs raising is likely to be a sensitive political issue), and so the Private Partner may need additional Contracting Authority support.

On availability-based projects the availability payment will typically include both a fixed component (where debt has been hedged) and a variable component (to reflect variable financing costs and variable inputs such as staff and materials).

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

The Private Partner will look to be kept neutral in respect of both international and local inflationary costs through an appropriate inflation uplift or tariff adjustment regime.

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

The Contracting Authority may need to provide a subsidy to the Private Partner on demand risk projects if the user cannot bear the cost increase.

Comparison with Developed Market

The fluctuation of inflationary costs is a greater risk in emerging markets than it is in developed markets and the Private Partner's expectation will be that this risk is borne and managed by the Contracting Authority during the concession term.

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