Political risk

Hydro power Hydro power

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

Political risk events are often included within the definition of force majeure, which relieves the Private Partner from default. However, the Private Partner is generally not entitled to deemed energy payments where it has been unable to generate because of political risk events.

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

Investors and commercial lenders may be able to cover themselves by using political risk or terrorism insurance.

Bilateral investment treaties may provide a degree of protection for expropriation.

The participation in the project of export credit agencies, multilaterals, domestic investors (debt, equity or capital markets) provides a degree of comfort that a political solution may resolve political risk issues that arise.

Comparison with Emerging Market

Generally there is little protection offered for political risks.



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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 takes the risk for set of political related events that are included within the definition of force majeure. They consist of (i) change in law, (ii) refusal or lapse of consents, and (iii) acts or omissions of Governmental authorities. The Contracting Authority takes the risk in the following ways: (i) by making deemed energy payments to the Private Partner where it is unable to generate due to such a political risk, (ii) adjusting the tariff to compensate for any additional costs incurred and (iii) where the PPA is terminated a result of a political risk, the Contracting Authority is obliged to purchase the plant by paying a purchase price adequate to cover debt, equity and some return on equity.

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.

Investors and commercial lenders may also be able to cover themselves by using political risk or terrorism insurance.

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

Depending on the credit rating of the Contracting Authority, Government support may be required to guarantee the deemed energy payments to the Private Partner, as well as termination payment under the power purchase agreement..

Comparison with Developed Market

Political risk is allocated to the Contracting Authority in emerging markets.

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