Financing the asset is an essential obligation in a PPP, and the risks of availability and cost of the financing should generally be borne by the private partner (with the exception and to the limit established in the contract in those projects under a co-financing scheme – see chapter 5.4).
Changes in interest rates may affect the costs (increasing investment costs by higher interest during construction (IDC) or increasing current costs during amortizations). The volatility of the interest rates may be handled by the private partner contracting hedging products such as Interest Rate Swaps (IIRs) and therefore should be borne by the private partner.
However, it may not be possible to control or manage the risk of interest rate variations between bid submission and financial close by any means (to contract insurance to cover this risk would be a significant stranded cost for an unsuccessful bidder). For this reason, it is good practice for the procuring authority to retain that risk, or share or cap it, especially in government-pays projects where the service payment is recalculated at financial close to neutralize the positive or negative movement of the interest risk (the base interest risk, that is, the cost of funds to the lender, rather than the margin to be applied).
Another issue is related to refinancing. When refinancing is an option (for example, a mini-perm strategy – see chapter 1.7.2), the risk of refinancing is commonly assumed by the private partner, but it is also not uncommon (or even an standard in some countries, for example, in the United Kingdom [UK]) that the government takes part of the potential upside. However, in some EMDE countries where a refinancing strategy may be a necessity (as the maximum debt term available from the outset may be too short), governments should consider the option to share downside risk of refinancing in order to help commercial feasibility and bankability.
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