Inflation risk

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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.

The power purchase agreement does not provide flexibility to the Private Partners to increase the Feed-in Tariff on account of inflation.

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

The Private Partner would look to mitigate this risk through hedging arrangements under the Finance Documents, to the extent possible in the market.

The contractor should also seek to hedge any foreign currency exposure it may have in relation to foreign currency imports.

Comparison with Emerging Market

In some markets the tariff will have an element of indexation to local inflation.

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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.

The power purchase agreement does not provide flexibility to the Private Partners to increase the Feed-in Tariff on account of inflation.

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

The Private Partner would look to mitigate this risk through hedging arrangements under the Finance Documents, to the extent possible in the market.

The contractor should also seek to hedge any foreign currency exposure it may have in relation to foreign currency imports.

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

The Contracting Authority will assume the risk of inflation in certain costs through the indexation of parts of the tariff to inflation. The indexation mechanism may apply to foreign and local components which have been variable costs such as operating costs.

Comparison with Developed Market

It is common practice to have all or part of the tariff indexed to deal with the impact of inflation.

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