The government (or a government owned enterprise) is usually a purchaser in the off-take agreement with the obligation to pay for the infrastructure services provided by the project company. As mentioned above, the "take or pay" arrangement means that the government would be obliged to pay for the infrastructure services regardless of whether it actually use it.
This in effect amounts to a guarantee by the government of minimum income stream to the project company. This is onerous on the government, because it requires the government to assume demand risks, input prices risks, currency risks and inflation risks for a considerable time into the future. This off-take agreement is often a pre-condition to the lenders agreeing to provide finance for the infrastructure projects.
As a purchaser under the off-take agreement, the government needs to consider the terms of the off-take agreement carefully. In particular:
• Quantity. A guarantee of the minimum quantity is in effect a guarantee of the demand for the infrastructure service, because the government will bear the loss if the demand does not reach that quantity.
• Price. Usually the price under the off-take agreement is a formula based on the input costs for the infrastructure goods or services plus a mark-up. This means that the government is likely to bear the risk of any increases in input price. The government needs to ensure that increases in the prices of input are the result of factors outside the project company's control (for example the commodity price) as opposed to factors that can be controlled by the project company (for example efficiency).
• Supply. Apart from the "guarantee" obligations, it needs to be borne in mind that an "off-take agreement" is still a supply agreement. The project company should be under an obligation to supply to the government goods and services at a specified quality. The project company should also not have the opportunity to divert the goods and services away from the government to a third party who is willing to pay a higher price than the price provided under the off-take agreement.