The risk of changes in law refers to the risk of changes that may affect the project outcome, impacting on the costs (capital costs by means of new investments) or current operating costs (higher maintenance costs or higher operating costs).
Law is broadly defined for this purpose as laws, regulations, and government policies.
As long as the change in law affects any business, the risks should be generally assumed by the private partner[11].
However, there may be changes in specific laws that do not affect the general course of any business, but only the specific sector in which the project company operates (for example, public transport, roads, and so on). These are generally known as specific changes in law. When a change in law is considered a specific change in law[12], there are a wide divergence of practices[13].
Moreover, there may be “discriminatory” changes in law specifically addressed to the project company. When a change in law is considered discriminatory, full compensation should be provided to the private partner.
This PPP Certification Guide considers it good practice to take back the risks of specific changes in law as long as they are significant in terms of consequences or impact. A good common approach is to share the risk — but always provide a cap in the overall exposure of the private partner, so the risk is quantifiable.
For example, the first x percent of the risk impact of a single event may be borne by the private partner. Beyond that threshold, the contract may establish that the parties will each assume 50 percent of the impact up to the upper limit of the risk, which may be defined in a y percent of cost deviation.
In addition, it is common and good practice to provide for an overall cap as a sum of the impact of all potential events, and established as a percentage of the original investment or an absolute figure.
Caution should be taken in order to avoid double paying for the service. For example, if a change in law requires replacement of an asset (for example, metering systems in water supply), the cost should be calculated as the difference from the estimated cost of any planned renewal of that asset.
[11] Some countries (including developed countries, for example, the UK) in some circumstances also share the risk with the public partner under the same scheme explained for specific changes in law, when these are unforeseen and related to or materially affecting capital expenditure (Capex) investment. Also, in EMDE countries in an early or immature stage of PPP development, it may be sensible to retain or share “general change in law” risks during those early stages of development of its PPP programs.
[12] Mandatory technological enhancements are a subset of changes in law and usually will refer to specific changes in law.
[13] Even discriminatory changes are dealt with in different manners in some countries. For example, the Private Finance Initiative (PFI) contract standards (version 4, 2007) in the UK also considers discriminatory changes adequate for shared risk treatment rather than providing full compensation.
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