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Managing Indirect Risks
Managing indirect risks helps to protect projects from external events that affect foreign exchange rates, inflation, costs of finance, and other market factors. In most cases, the private sector is best placed to assume these risks, but it will do so only if the government provides certain provisions within a contract.1
MACROECONOMIC RISKS Macroeconomic risks are common to many sectors, and their impact on an urban bus project will depend on the project’s components and stakeholders’ objectives and restrictions. Whether or not the project has international components, the profiles of stakeholders will make certain risks more relevant than others. Similarly, the project’s exposure to the cost of inputs over time will depend mostly on bus technology. The following are examples of key macroeconomic risks: • Inflation. If the private sector assumes the demand risk, then the government can help the private partner to mitigate it by allowing for inflation-related adjustments to tariffs (APMG International 2018g). The government can also reduce this risk by making payments to the private partner in the currency of the loans. • Interest rates. Apart from the impacts of inflation, the private sector can manage the risk of rising interest rates, especially if the operator took debts involving variable interest rate payments. • Foreign exchange. The project structure should take into account the private sector’s ability to mitigate currency risk (and the market’s ability to provide for its mitigation). An urban bus public-private partnership (PPP) can integrate a foreign exchange reserve in the project structure. The government can provide a foreign exchange guarantee and may be expected to do so when the local currency is more volatile than commonly used international currencies. Maintaining reserves in the currency of the debt and securing central bank support can help to mitigate this risk. Finally, this risk can be partially mitigated by encouraging local currency financing when it is possible and affordable. 83
