Inflation risk

Water Desalination Water Desalination

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.

On availability-based projects, during the concession term, the availability payment will typically include both a fixed component (where debt has been hedged) and a variable component that will include an escalation factor that accounts for rises in costs as defined by the consumer price index.

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 payment mechanism incorporates indexation for inflation costs by incorporating the consumer price index into the monthly payments.

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 Contracting Authority by way of tariff adjustment in operation phase.

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 labour and chemicals).

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 payment mechanism incorporates indexation for inflation costs by incorporating the consumer price index into the monthly payments.

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.

Indexation for inflation is typically linked to local (sometimes in conjunction with an international) consumer index. In emerging markets, local consumer index lack independence and are sometimes manipulated by the Government for fiscal and social reasons.

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