Political risk

Airport Airport

Description (What is the Risk)

The risk of Government intervention, discrimination, seizure or expropriation of the project.
Cancellation of bilateral treaties or failure to maintain membership of international bodies.
Industrial action by public sector airport workers.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Contracting Authority will bear responsibility for political events outside the Private Partner's control, and the Contracting Authority will be responsible should it fail to maintain in existence the licenses (unless the termination or non-renewal is due to default by the Private Partner) and access to the airport and transport links necessary to allow the Private Partner to fulfil its obligations.

Industrial action by workers at the airport who are to transfer to the Private Partner can be an issue if their conditions are not as good or they perceive that they may be disadvantaged in the future. Also customs workers and air traffic controllers often remain public sector employees and can be prone to taking industrial action that can cause the Private Partner to fail to meet performance targets at the airport or suffer loss of revenue.

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

The Contracting Authority will outline certain political events as delay events, compensation events, excusing causes that involve a breach of obligations or interference by the Contracting Authority with the project.

Strikes by public sector workers are often treated as a relief or similar event that means the Private Partner will not be in breach of performance obligations.

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

This type of issue will typically lead to a termination event where the Contracting Authority will need to compensate debt and equity in full.

Comparison with Emerging Market

The type of political risk events that occur in developed markets are likely more subdued and less drastic than emerging markets. As such, political risk insurance is not typically obtained.

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Description (What is the Risk)

The risk of Government intervention, discrimination, seizure or expropriation of the project.
Public sector budgeting.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Contracting Authority typically bears responsibility for political events outside the Private Partner's control and the Contracting Authority will be responsible should it fail to maintain in existence the licenses (unless the termination or non-renewal is due to default by the Private Partner) and access to the airport and transport links necessary to allow the Private Partner to fulfil its obligations.

This concept may include any 'material adverse Government action' (broadly speaking any act or omission of any Government entity which has a material adverse impact on the Private Partner's ability to perform its obligations and/or exercise its rights under the concession agreement) and may also include a specific list of events of a political nature such as expropriation, interference, general strikes, discriminatory changes in law (see section on regulatory/change in law risk), as well as more general uninsurable events such as risks of wars / riots / embargos etc.

The Private Partner would expect compensatory relief. The Government may not always be able (or is unwilling) to pay such compensation, Therefore the Private Partner may also need an ability to exit the project if the political risks continue for an unacceptable duration.

In Colombian PPP projects the political risk, understood as, the risks derived from regulatory and Constitutional changes including any legislative, political or macroeconomic effect over the Concession, is allocated as a Private Partner risk. Even though the Private Partner has not control over these situations, whatsoever, the contractual design disables it to transfer or share the risk with the Public Partner. Additionally, as these are typical 'non-insurable' risks, they imply the obligation from the Private Partner to directly assume the risks. It may be noted that the 'breach of the economic equilibrium of the contract' may also be in place for these type of situations.

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

The Contracting Authority will need to ensure that other Government departments keep in line with the project objectives and will need to actively manage the various stakeholders in the project to achieve this.

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

This type of issue will typically lead to a termination event where the Contracting Authority will need to compensate debt and equity in full potentially with a Government guarantee.

Comparison with Developed Market

Investors and commercial lenders may also be able to cover themselves by use of political risk insurance, leaving this risk to be managed by the insurer against the Contracting Authority.

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