3.2.3.3 Approach (c): More developed risk sharing -
Over the last two decades, a more developed approach to sharing change in law risk has been seen in some jurisdictions and has become part of standardised contract templates33. A version of this approach is set out in Section 3.3, Sample Drafting 3A, and is based on the following risk allocation:
• Discriminatory Changes in Law - these are changes in law which are discriminatory because they apply to the PPP Project and not to similar projects, or to the Private Partner and not to other persons, or to PPP operators and not to other parties.
• Specific Changes in Law - these are changes in law specifically impacting the provision of services the same as or similar to the PPP Project services or the shareholders of businesses providing such services (the Contracting Authority will want to clearly define the nature of the services).
Discriminatory and Specific Change in Law risk is allocated to the Contracting Authority to address the Private Partner's concern that laws may be passed that have the effect of singling out itself or private operators of infrastructure in a manner that has an adverse impact on expected equity return. For example, this could be the introduction of a tax or surcharge which only applies to its Project or that is only applicable to its business because it is being operated by the private sector, or the implementation of more significant environmental regulations that are not being imposed on public sector operators of similar assets.
• General Changes in Law requiring capital expenditure in operating period - these are general changes in law (i.e. excluding Discriminatory Changes in Law and Specific Changes in Law) which require the Private Partner to incur capital expenditure after construction completion during the operating period. The risk of these changes is also allocated to the Contracting Authority as the Private Partner has no means of absorbing potentially significant costs once the PPP Project is operational and the relevant asset built.
• Any other Changes in Law - these are all other changes in law including those which trigger capital expenditure during the construction period (but excluding the categories above). The risk of these changes is allocated to the Private Partner throughout the duration of the PPP Contract on the basis that the Private Partner is able to manage and absorb any price implications. The ability to pass the risk of changes requiring capital expenditure in the construction phase will, however, depend on the length of the construction period and the predictability of the legal regime. A particularly long period and/or less stable regime may make this unbankable and a different risk allocation might be needed.
| EMERGING AND DEVELOPED MARKET DIFFERENCES Under this more developed risk sharing approach the Private Partner will bear some of the general business risk that applies to all businesses. It is considered generally more beneficial to the Contracting Authority, but this approach may not be bankable in every jurisdiction and should be contemplated on a case by case basis. Even in markets using this approach there will be instances where this risk allocation is not fully achievable due to the nature of the PPP Project and the extent to which the applicable legal and regulatory regime is settled. |
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33 See the Infra Australia PPP Guidelines and the UK PF2 Guidance and the definition of "Relevant Change in Law" in the Dutch Model.