Regulatory/change in law risk

Heavy rail Heavy rail

Description (What is the Risk)

The risk of law changing and affecting the ability of the project to perform and the price at which compliance with law can be maintained.
Change in taxation.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Network Rail is likely to seek change in law protection for specified events.

Similarly, a manufacturer will seek change in law protection, and the parties will usually seek to agree a list of Foreseeable changes in law for which no protection is available.

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

None.

Government Support Arrangements (What other government measures may be needed to be taken)

None.

Comparison with Emerging Market

Projects in the rail sector involve a close interaction with passengers and safety regulation plays a paramount role. A change in health and safety legislation may well be of general effect but may have a disproportionate effect on the rail sector. The parties are expected to comply with foreseeable changes in law.

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Description (What is the Risk)

The risk of law changing and affecting the ability of the project to perform and the price at which compliance with law can be maintained.
Change in taxation.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Contracting Authority typically bears principal responsibility for changes in law post-bid / post-contract signature.

There may be a degree of risk sharing with the Private Partner and there may be certain risks that the Private Partner is expected to bear alongside the remainder of the market.

The Private Partner would look to be kept whole in respect of changes of law which are discriminatory (towards the project or the Private Partner), or specific (to the rail or transport sector).

The Private Partner may also receive protection against other (general) changes in law, however the level of protection will reflect the Private Partner's ability to mitigate this risk (through the tariff or inflation regime, if applicable) and whether the risk is of general application to the market (e.g. an increased tax on corporate tax or dividends across the board). It may also be appropriate for the Private Partner to bear a certain financial level of risk before compensation becomes payable, to ensure that claims are only made for material changes in circumstances.

Changes in law should always entitle the Private Partner to a variation where this is necessary to avoid an impossible obligation, or otherwise should give rise to a right to terminate (typically on a Contracting Authority default basis).

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

The Contracting Authority will need to ensure that various Government departments keep the project in mind when passing new laws to ensure that the Private Partner is not inadvertently affected.

The various Government departments that may impact on the project should therefore be cognisant of the risk allocation in the project when passing laws and regulations that may have an impact on it.

Government Support Arrangements (What other government measures may be needed to be taken)

Some projects may also provide for a stabilisation clause that entrenches certain legal positions (such as the current tax regime) against any future changes in law. This may require a level of parliamentary ratification of the concession agreement.

However, the stabilisation method is generally not favoured by Governments or NGOs (e.g. because of the concept of Private Partner immunity from updates to environmental laws, for example).

Comparison with Developed Market

In emerging markets, the Private Partner is likely to have a greater level of protection from changes in law to reflect the greater risk of change (including both likelihood and consequences) and in order to attract investors to the project. In that way, the Contracting Authority would be expected to assume more change in law risk than compared to a project in a developed market.

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