Market risk

Market risk is the risk that:

• demand for a service will vary from that initially projected; and

• the price for a service will vary from that initially projected, so that the total revenue derived from the project over the project term will vary from initial expectations.

With social infrastructure projects, government generally takes downside demand risk by making payments based on availability rather than use. Price risk is generally borne by the private sector, but limited price risk is often accepted by government through indexing the service fee and benchmarking certain services.

A government also generally takes upside demand risk, that is, the risk that demand will exceed the size of the facility provided. In the case of schools, government may assume the risk of enrolments exceeding base load school design by incorporating the provision of temporary classrooms into the payment mechanism. In other cases, for example, a desalination plant, government may activate an option of a pre-agreed expansion plan with a pre-agreed cost estimate. Government would take the risk on the final cost.