Risk Profile of Infrastructure Projects

Risk Profile of Infrastructure Projects

At the heart of project financing is a contract that allocates risks
associated with a project & defines the claims on rewards.

Four kinds of risks can be distinguished …
1. Currency
2. Commercial
3. Policy induced
4. Country
 Currency risk

The risk of currency depreciation falls on the project sponsor, & ultimately
on the consumers of the service.

Service prices have been linked to an international currency.
 Commercial or Market Risk

Two types of commercial risk may be distinguished…
1. Relating to costs of production
2. Arising from uncertainties in demand for services

Contracts include bonuses for early commissioning of the project &
penalties for late completion.

A fixed payment for overall capacity also shifts the risks of cost overruns
to the private sponsor.

A power or water supplier is sometimes penalized for capacity availability
below pre specified levels or the contract may require that a plant be
available in effective working order for a specified period of time.

Project sponsors are able to transfer some of these risks to other private
parties.

To transfer construction risk to specialized construction companies
through turnkey contracts.

Sector specific market risk bearing features are…
1 In telecommunications
projects
The market risk is typically borne by the sponsor.
2 In electric power &
water sectors
Limitations on assumption of market risk arise because
payments to cover costs are not assured.
Governments need to decisively eliminate the prospect
that investor will be bailed out if circumstances are
unfavorable.
3 In transportation
Project
Mexican toll roads & certain Argentine rail concessions
Governments permitted revisions in contract terms
when traffic levels were lower than expected

Private investors may wish to insure themselves against commercial risks.

The private market for risk insurance for international transactions is
small. While short term insurance for trade credit is available, private
insurance for infrastructure projects is uncommon.
 Sector policy induced Market risk

The instrument that protects the power supplier is the "Take or Pay"
contract, or power purchase agreement.

Under such a contract, the buyer agrees to pay a specified amount
regardless of whether the service is used.

The government thus provides a contract compliance guarantee – a useful
transitional measure while the long term goal of sector reform is being
addressed.