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

Political risk is included as an event of force majeure under the power purchase agreement.

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

As the event is considered a force majeure, it is unlikely that the Private Partner will be able to claim damages from the contracting authority under the power purchase agreement. The Private Partner shall seek to mitigate this risk through insurance.

Comparison with Emerging Market

Political risk in developed markets have become a higher risk issue in recent years due to the adverse changes in law in markets such as Spain, Bulgaria and Czech Republic. Private Partners may seek assurances that they are protected against political risks through the general laws and bilateral investment treaties.

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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

Expropriation and nationalisation of a material part of the facility and/or shares in the Private Partner are treated as Government default. The Contracting Authority will bear this risk. The Private Partner will be entitled to issue notice on the Contracting Authority to remedy within a specified period of time, failing which it will be entitled to terminate the relevant agreement and shall be entitled to compensation from the Contracting Authority.

A specific list of events of a political nature (such as general strikes, risks of wars / riots / embargos) is treated as force majeure events. As set out in relation to force majeure, the Contracting Authority will share in the responsibility for these political events provided certain conditions are met.

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)

To the extent that certain political risks occur, it may lead to a termination event and the Contracting Authority stands behind debt and equity.

Comparison with Developed Market

A recent trend is splitting political risk into direct and indirect political risk events. Direct political risk events are those events which are clearly the responsibility of Contracting Authority or other public bides such as expropriation. Indirect political events include war, blockades and other events caused by third parties. Contracting Authorities may seek to apply a different regime to the types of political risk event.

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