Regulatory/change in law risk

Power transmission Power transmission

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 risk of change in law sits mostly with the Contracting Authority but there will be a degree of risk sharing in the following manner:

The Private Partner will be kept whole in respect of changes in law which: (i) are discriminatory to the project or the Private Partner (ii) are specific to the transmission sector or public-private partnership transactions, (iii) affect occupational health and safety requirements applicable the construction or operation and maintenance of transmission facilities or (iv) affect value added, sales or other taxes, other than taxes on income or capital. A change in law is often subject to a de minimis threshold before the Private Partner is entitled to compensation

The Private Partner will not be compensated for general changes in law that only affect operational expenditure or taxation (i.e. affect the market equally). Changes in law will always entitle the Private Partner to a variation where this is necessary to avoid an impossible obligation. If this cannot be achieved the Private Partner will typically be entitled to terminate as if a Contracting Authority breach had occurred.

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)

Past concession models (including that developed in the UK) used to require the Private Partner to assume, and price for, a specified level of general change in law capex risk during the operational period, before compensation would be paid. The UK Government ultimately decided that this allocation did not represent value for money and reversed this position. Some countries which adopted the SOPC model had already taken this approach. Accordingly the Contracting Authority should be mindful of how it will fund these changes should they arise.

Some projects may also require 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 than in developed markets, 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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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 risk of change in law sits mostly with the Contracting Authority but there will be a degree of risk sharing in the following manner:

The Private Partner will be kept whole in respect of changes in law which: (i) are discriminatory to the project or the Private Partner (ii) are specific to the transmission sector or public-private partnership transactions, (iii) affect occupational health and safety requirements applicable the construction or operation and maintenance of transmission facilities or (iv) affect value added, sales or other taxes, other than taxes on income or capital. A change in law is often subject to a de minimis threshold before the Private Partner is entitled to compensation

The Private Partner will not be compensated for general changes in law that only affect operational expenditure or taxation (i.e. affect the market equally). Changes in law will always entitle the Private Partner to a variation where this is necessary to avoid an impossible obligation. If this cannot be achieved the Private Partner will typically be entitled to terminate as if a Contracting Authority breach had occurred.

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)

Past concession models (including that developed in the UK) used to require the Private Partner to assume, and price for, a specified level of general change in law capex risk during the operational period, before compensation would be paid. The UK Government ultimately decided that this allocation did not represent value for money and reversed this position. Some countries which adopted the SOPC model had already taken this approach. Accordingly the Contracting Authority should be mindful of how it will fund these changes should they arise.



Comparison with Developed Market

In developed markets, the Private Partner will 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. Such risk may be heightened in jurisdictions where the PPP legislation allows for a local assembly to veto the project.









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