Inflation risk

Port Port

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 risks during construction are typically borne by the Private Partner, while inflation risks during the concession term will typically be primarily borne by the Contracting Authority.

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 Private Partner and transferred to the port users.

The Private Partner retains the risk of the impact on demand caused by any increases in the tariffs.

The Private Partner will accordingly need the ability to increase the port tariffs, but this ability may often be subject to regulation (as tariff-raising is likely to be a sensitive political issue), and so the Private Partner may need additional Contracting Authority support.

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

This risk may be mitigated to some extent where the Private Partner has the right to collect the tariffs in hard currency, which more closely matches project expenditure / financing.

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

Support may be needed eg to ensure tariffs can be levied in foreign currency and/or to ensure swift and reliable convertibility of local currency, as well as expatriation of project revenues.

Comparison with Developed Market

If tariff increases are subject to regulation, then this creates uncertainty. The Private Partner may be able to get the Contracting Authority to stand behind any shortfalls in tariff increases which the Private Partner anticipates making (eg to ensure that USD inflation was covered as a minimum).

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