3.2.3.2 Approach (b): Basic risk sharing by the Private Partner -

One way in which change in law risk can be allocated between the Private Partner and the Contracting Authority is by setting a minimum cost threshold, generally on a yearly basis, below which the Private Partner will not be compensated. In other words, the Private Partner will only be entitled to compensation to the extent that it is able to demonstrate that the aggregate costs incurred as a result of a change in law exceed the agreed threshold during a specified period in time, e.g. per calendar year. Subject to an appropriate threshold being set, this approach will generally be acceptable to Lenders as it makes the risk quantifiable. Unlike Approach (c) below, there is no distinction between general and discriminatory changes (although changes in tax legislation may have to be discriminatory to qualify). This approach has been seen in recent PPP Contracts in the Philippines and an example is set out in Section 3.3, Sample Drafting 3.

Setting a clear monetary threshold is preferable to the approach seen in some PPP Contracts where "materiality" criteria are included in defining a qualifying change in law but no clear monetary threshold. This does not provide any certainty for the Parties (or the Lenders) and disputes are likely unless it is clearly defined. A sample of this approach is given in Section 3.3, Sample Drafting 3, Clause (3)(c) and Section 3.4, Sample Drafting 3A, Clause (3)(c).