Political risk

Power transmission Power transmission

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 all or a portion of the project be seized or expropriated.

The Contracting Authority will be responsible to provide availability payments regardless of changes in public sector budgeting.

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

The Contracting Authority will outline certain political events as delay events, compensation events and/or 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 Developed Market

The type of political risk events that occur in developed markets are likely more subdued and less drastic than in 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 should bear responsibility for political events outside the Private Partner's control, and the Contracting Authority will be responsible should all or a portion of the project be seized or expropriated.

The Contracting Authority will be responsible to provide availability payments regardless of changes in public sector budgeting.

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

The Contracting Authority will outline certain political events as delay events, compensation events and/or excusing causes (relief from payment deductions) that involve a breach of obligations or interference by the Contracting Authority with the project. It can take some Contracting Authorities time to understand and accept this risk as they may not see themselves as a 'Government entity' that can manage this risk itself but it is a question of risk allocation.

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 Developed Market

In emerging markets, 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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