Risk Category

Description

Consequence

Preferred allocation

Mitigation

Financial risk

Interest rates pre-completion

The risk that prior to completion interest rates may move adversely thereby undermining bid pricing.

Increased project cost.

Government usually takes interest rate risk up until financial close and during the operations period but not during the constructions period(s). The private party takes this risk during the construction period(s).

Both Government and the Private Party would manage this risk by hedging interest rates.

Financing unavailable

The risk that when debt and/or equity is required by the private party for the project it is not available then and in the amounts and on the conditions anticipated.

No finance to progress or complete construction.

Government ultimately bears this risk because it can affect the provision of adequate public services. This is despite the fact that Government would have the right to terminate the private party in such circumstances.

Government will try to mitigate this risk by requiring all bids to have fully documented financial commitments with minimal and easily achievable conditions.

Further finance

The risk that where Government is required under the contract to pay for a variation, the private party cannot obtain finance. In this case, the Government must pay for the variation upfront instead of through an adjustment of the service charge.

No financing available to complete further works required by Government.

Government takes the risk that private finance is unavailable.

Government can mitigate this risk by:contractually requiring the private party to exercise commercial and prudent endeavours to obtaining financing acceptable to Government or where it believes such variations are inevitable (particularly during the construction phase) requiring the private party to put in a place a variation facility.

Refinancing benefit

The risk (upside) that at completion or other stage in project development the project finances can be restructured to materially reduce the project's finance costs.

A beneficial change in the financing cost structure of the project.

The benefit of this risk will be shared equally by Government and the private party.

Government will contractually require the private party to share half of any gains made during a refinancing (subject to the project meeting its projected equity return).

Tax changes

The risk that before or after completion the tax impost on the private party, its assets or on the project, will change.

A negative effect on the private party's financial returns and in extreme cases,  it may undermine the financial structure of the project so that it cannot proceed in that form

Private party

The private party can mitigate against this by ensuring that its financial returns can withstand such change. With respect to specific infrastructure taxation particularly that relating to transactions with Government, the private party will be required to obtain a private tax ruling from the ATO.