Political risk

Natural gas distribution Natural gas distribution

Description (What is the Risk)

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

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 lease or licence and access to necessary sites and the network necessary to allow the Private Partner to fulfil its obligations.

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 may lead to a termination event where the Contracting Authority will need to stand behind debt and equity or the Private Partner will seek general protection from investment protection laws.

Comparison with Emerging Market

The major political risks for a regulated gas distribution network is change in the applicable regulatory regime. The Private Partner will often assess this risk as part of its initial due diligence review.

Back to Natural gas distribution

Description (What is the Risk)

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

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.

This concept may include any act or omission of any Government entity which may have a material adverse impact on the Private Partner's ability to perform its obligations and/or exercise its rights under the concession.

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 can lead to a termination right for the Private Partner and 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.

Back to Natural gas distribution