Risk Category

Description

Consequence

Mitigation

Preferred Allocation

Interest rates pre-completion

The risk that prior to completion interests rates move adversely thereby undermining the bid pricing

Increased project cost

Interest rate hedging may occur including under Project Development Agreement

Government may assume or share

Sponsor Risk

Risk that the private party is unable to provide the required services or becomes insolvent or is later found to be an improper person for involvement in the provision of these services or financial demands on the private party or its sponsors exceed its or their financial capacity causing corporate failure

Cessation of service to government and possible loss of investment for equity providers

Ensure project is financially remote from external financial liabilities, ensure adequacy of finances under loan facilities or sponsor commitments supported by performance guarantees; also through the use of non financial evaluation criteria and due diligence on private parties (and their sponsors)

Government

Financing Unavailable

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 funding to progress or complete construction

Government requires all bids to have fully documented financial commitments with minimal and easily achievable conditionality

Private Party

Further Finance

Risk that by reason of a change in law, policy or other event additional funding is needed to rebuild, alter, re-equip etc. the facility which cannot be obtained by the private party

No funding available to complete further works required by government

Private party must assume best endeavours obligation to fund at agreed rate of return with option on government to pay by way of uplift in the services charge over the balance of the term or by a separate capital expenditure payment; government to satisfy itself as to likelihood of this need arising, its likely critically if it does arise, and as to financial capacity of

private party to provide required funds and (if appropriate) budget allocation if government itself is required to fund it.

Government takes the risk that private finance is unavailable

Change in Ownership

Risk that a change in ownership or control of private party results in a weakening in its financial standing or support or other detriment to the project

Government assurance of the financial robustness of the private party may be diminished and, depending on the type of project, probity and other non-financial risks may arise from a change in ownership or control, which may be unacceptable to government.

Government requirement for its consent prior to any change in control. (Private party will seek to limit this control to circumstances where substantive issues are of concern such as financial capacity and probity).

Government risk as to the adverse consequence of a change if it occurs; private party risk that its commercial objectives may be inhibited by a restrictive requirement for government consent to a change

Tax Changes

Risk that before or after completion the tax imposed on the private party, its assets, or on the project will change

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

Financial returns of the private party should be sufficient to withstand such change; with respect to specific infrastructure taxation particularly that relating to transactions with government, the private party should obtain a private tax ruling.

Private party