Political risk

Toll Road Toll Road

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 toll road and surrounding lands necessary to allow the Private Partner to fulfil its obligations. For example, under German law, the Private Partner will be secured by virtue of law against expropriation and discriminating legislation.

However, the Contracting Authority may be reluctant to accept relief and compensation for general changes in law, since this risk should be with the Private Partner.

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. Alternatively, statutory law may provide for respective protection for the benefit of the Private Partner.

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.

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 must 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 of the Contracting Authority's payment obligations.

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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