Financial risk and benefits

Financial risk includes the risks that:

• private finance will not be available;

• the project will not prove financially robust; and

• changes in financial parameters will alter the bid price before financial close.

If a project fails to gain finance or fails financially later, government is affected because it must obtain alternative services. These risks may be lessened by requiring bids to be fully underwritten for both debt and equity, and by government not automatically accepting the lowest bid.

Further risks associated with changes in financial parameters before financial close may be assumed or shared by government depending on the circumstances (e.g. by agreeing to accommodate interest rate changes during that period). During the term, the private party may also receive benefits from refinancing the project. Where a refinancing creates a financial benefit through lower interest margins (mature markets) or benchmark interest rates, government will usually share 50 per cent in those benefits. Arrangements for sharing in refinancing gains need to be clearly established in the contract.