Regulatory/change in law risk

Natural gas distribution Natural gas distribution

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 impact of change in law on a gas distribution business is often dealt with through the regulatory reset process. In some cases, the regulatory regime will often allow the network operator to apply for tariff adjustments outside the usual reset process where the costs of operating and maintaining the pipeline have been increased materially since the last reset.

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

Change in law risk that is retained by the Private Partner may be mitigated by indexation provisions (on the basis that general changes in law will affect the market equally and should be reflected in general inflation).

Some projects only permit the Private Partner to claim relief for general changes in law occurring after completion of construction. This approach may be justified if the country's legal regime ensures that the prevailing legal regime at the start of construction is fixed until the works are complete (i.e. does not operate retrospectively to projects in progress).

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

The Contracting Authority should be mindful of how it will fund these specific/discriminatory changes should they arise.

Comparison with Emerging Market

In developed markets, the Private Partner will typically not be compensated for General Changes and likely will have less protection than in emerging countries where Contracting Authority will be expected to bear a significant portion of the change in law risk in order to attract private investment.

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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.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The risk of change in law sits with the Contracting Authority. The Private Partner will be entitled to claim for any increased costs and in relation to delay arising from a change in law.

A change in law is generally specifically defined and may include:

(i) any law coming into effect after the effective date, or existing law being modified after the effective date; (ii) any required Private Partner consent being terminated or the introduction of conditions upon renewal which materially adversely affect the Private Partner; (iii) the unjustified refusal to grant a permit; and (iv) a change in gas quality standards.

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:

(a) 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;

(b) the Private Partner does not generally have to prove that it could have anticipated the change in law, provided that it occurred after an agreed base date; and

(c) changes in the environmental, safety and health law which are no more onerous than those prevailing internationally specifically excluded as changes in law.

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