Regulatory/change in law risk

Solid waste collection, disposal, landfill and recycling Solid waste collection, disposal, landfill and recycling

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 are: (i) Discriminatory (to the project or the Private Partner) (ii) specific (to the waste sector) or (iii) general change in law affecting capital expenditures. 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.

In recognition that the environmental legislative landscape has shifted quickly in recent years practice has developed in the UK for identifying a list of 'foreseeable' but unquantifiable laws which parties agree are likely to come into effect during the construction phase but which are sufficiently underdeveloped that it would not represent best value for the Private Partner or its EPC contractor to price it. Changes relating to these items will be the responsibility of the Contracting Authority.

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).

Change in law risk may also be mitigated where there is an ability to pass back changes in the tariff charged on the project. This is less commonly available on waste management BOT projects which tend to be structured on an availability-payment basis rather than a demand basis.

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/WIDP model had already taken this approach. Accordingly the Contracting Authority should be mindful of how it will fund these changes should they arise - changes in gatefee may be possible but this may have a detrimental effect on achieving recycling/landfill diversion targets.

Comparison with Emerging Market

Projects in the waste management sector involve a close interaction with environmental regulation. A change in environmental legislation may have general application but may have a disproportionate effect on the waste sector. For this reason some waste management BOT projects have adapted the standard definitions of discriminatory/specific change in law to include any changes in law having such an effect.

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