Political risk

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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 will bear responsibility for political events outside the Private Partner's control, and the Contracting Authority will be responsible should it fail to continually provide the Private Partner with the license and access to the system and surrounding lands necessary to allow the Private Partner to fulfil its obligations.

In a Dutch project this is generally not included in the agreement, other than the Contracting Authority having a general obligation to provide access to the site.

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 (relief from payment deductions) that involve a breach of obligations or interference by the Contracting Authority with the project.

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 stand behind debt and equity.

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 (which will include ensuring that there are sufficient funds to meet any Contracting Authority payment 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) and may also include a specific list of events of a political nature such as expropriation, interference, general strikes, discriminatory changes in law, as well as more general uninsurable events such as risks of wars / riots / embargos etc.

The Private Partner would expect not only compensatory relief but also an ability to exit the project if the political risks continue for an unacceptable duration.

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 stand behind debt and equity 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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