There will inevitably be some risks over which either party has little or no control. These risks are likely to be allocated to the private sector if they are considered to be part of the business environment generally.
Rather than government incurring a high premium from the private sector to assume such risks, a better value for money outcome may be achieved by adopting a shared approach to the risks, such as the material adverse effect regime.
Material adverse effect is suited to risks that are difficult to identify in advance, whose consequences are difficult to measure and which are beyond either party's control. A material adverse effect regime anticipates the parameters of the project's capacity to withstand a material adverse effect (such as capacity to repay debt) but leaves open to negotiation the manner by which the project can be rectified to continue within those parameters. The regime would only be triggered where the risk materialised and caused significant financial loss.
There are a number of methods available to redress the material adverse effect, including varying the concession period, altering risk allocation in the project documents, varying the state's right to receive monies, requesting lenders to restructure the project financing arrangements, financial contributions by the state, and other relief mechanisms as agreed to by the private and public sectors.
Additional information on material adverse effect is contained in the contract development and management supporting document.