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Risks in Infrastructure

Risk Analysis & Management

Pramod K Yadav
15th May, 2016

Ex: India (as per Ministry of Finance): 19 risks in five categories (Pre-operative. handover and others) Philippine Public-Private Centre: 11 specified risks cross 4 broad categories RAM.Definition: Risk in Infrastructure Investment • No Specific Definition • Mostly defined as loss in income or potential problem that can be mitigated • Condition of investment that leads to consequences that required mitigation or offsetting • Categorisation or types of risks varies across the sectors and regions. construction. 17th May-2016 LIM . operation.

Types of Risks External Market Volatility Risks Political and Macroeconomic Risks Global/ regional Financial risks thats beyond the country of individual countries and economies. Demand or Volume Risk • Technology Risk Risks Specific to PPP agreement When counter parties to PPP agreement are not able to meet their responsibilities under agreement Risks include: • Market. 17th May-2016 LIM • Breach of Contract Risk Interest Rate Risk Inflation Risk • Exchange Rate Risk • • Sector Risks Project Risks Circumstances that can affect responsibilities agreement and benefits achieved from project Policy Risks Regulatory Risks to an Economy or other factors that affect one sector Risks include: • Market. Spillover effects on: Country specific factors that can reduce profitability of business Risks include: • • • • Banking Energy Monetary Policies • Risks include: • Financial Risks • Design Risks • Construction Risk • Completion Risk • Operation and Maintenance Risk • Project Cost Overrun Risk • Environmental/ Social safeguards Risk RAM. Demand or Volume Risk • Technology Risk .

Magnitude of Risks Key Risks & Project Development Phase Varies on (EIC approach) • • • Country and its investment climate Sector and its institutional maturity project and across its life cycle Three Distinct Periods affecting risk allocation for projects: Development Construction phase Phase Operational phase Planning and Engineering environment Demand Project Design Market Conditions Competing Facilities Political Operation Cost Overrun and Maintenance Change of law Construction Appropriatio Delay n Regulatory Financial Default • Project Development Phase • Construction Phase Site Refinancing • Operational Phase Permitting Political Procurement Regulatory Financing Handback/res idual value RAM. 17th May-2016 LIM .

17th May-2016 LIM .Typical Risk Profile over Project Cycle RAM.

each of the identified risks have specific set of instruments than can be used to mitigate the risk RAM. 17th May-2016 LIM .Risk Mitigation Measures Risk mitigation: risks which are transferred to other parties Applicability of different risk mitigation Mitigation instruments can be categorised as measures depends on the nature of 1) Type of Beneficiary (debt provider or equity investors) infrastructure financing selected for a project 2) Type of Risk covered 3) Coverage of Risk (partial or full) Example of Risk Mitigation Instrument with Underlying Risk Multiple Development Banks Soveregin Debt Export credit agencies Public Private Partial Credit Political Risk Insurance Political risk or comprehensive insurance/ guarantee Partial Credit Political risk or comprehensive insurance/ guarantee Corporate Partial Debt Credit Bilateral Donor Private Guarantors and Insurers Credit guarantee Partial Credit Credit guarantee For specific project & country/region.

MDB Guarantees • Guarantees are viewed as a key financial instrument to support the flow of private investments for development • The leveraging power of the guarantee instrument is particularly relevant in attracting private capital where investors and lenders are seeking to mitigate risk • Greater use of guarantees is called for. in particular. to support developing countries’ infrastructure investment plans help countries’ access to the markets during the ongoing financial crisis • Guarantees could be useful in addressing local currency financing and in developing local currency markets Source: The World Bank .

g. increasing issue amount and/or enabling access to new markets (loans & bonds). PCG/PBG improves terms of commercial debt by extending maturity. lowering interest rate costs. infrastructure projects. so long as there is a sovereign counter-guarantee (PCG) By covering part of debt services. 17th May-2016 LIM . or SOE and other borrower. budgetary financing) Source: The World Bank RAM.Partial Credit Guarantees PCG/PBG guarantees part of debt services to lenders or bond holders regardless the cause of default Can be offered for Government (PCG/PBG). making commercial debt more suitable for development support (e.

change in law/regulatory risk. etc. expropriation risk. RRG reduces project risk for private financiers. reduce cost of capital and extend debt tenor to better meet project needs World Bank PRGs are often provided to Public-Private Partnership projects along with MIGA political risk insurance and IFC loan/equity Source: The World Bank investments RAM. and thus improve bankability of the project to enable/facilitate financing. 17th May-2016 LIM . such as the risk of nonpayment by Government/SOE.Partial Risk Guarantees PRG covers lenders against the risk of Government non-performance of its contractual obligations to a specific project.

including Public-Private Partnership (PPP) projects.g. state-owned utilities. IBRD may provide PRGs for enclave projects in IDA-only countries • • Indemnity: All guarantees require a counter-guarantee from the member country Coverage: The World Bank provides guarantees only to the extent necessary to mobilize the private financing RAM. or to protect the project company (“Letter of Credit” or “Deemed Loan” PRGs) • Partial Credit Guarantees (PCG) support commercial borrowing of either the government or non-government borrower (e. PCGs and PBGs only to IBRDeligible countries. banks) chiefly in support of public investment projects • Policy-Based Guarantees (PBG) is a version of a PCG in support of commercial borrowing of the government for budget financing and to support a reform program  Country eligibility: • PRGs are available to all IBRD and IDA countries. green-field and rehabilitation/expansion projects. 17th May-2016 LIM .World Bank Guarantees • Partial Risk Guarantees (PRG) support private sector investment projects. PRG can be structured to protect lenders of limited-recourse project finance debt. concession and privatization transactions.

Risk Measures to Close Project Viability Gap PRG: Partial Risk Guarantee PCG: Partial Credit Guarantee PRI: Partial Risk Insurance Exploration of new Measures/ Instruments is a continuous process and keeps on changing. intends to reduce Viability Gap sufficiently to make a project feasible for private sector participate. RAM. 17th May-2016 LIM . so that with new found instruments risks can be further minimised Instruments shown.

resulting in their improper and sub optimal use and loss government credibility and private market • Need of attracting long term capital through credit enhancement. 17th May-2016 LIM .Conclusion • Infrastructure investment.. RAM. requires more patient in emerging and developing countries • Higher level of risks in emerging and developing countries • Number of risk mitigating instruments but some of them are not available for certain borrower/ projects.a long term investment. • Lack of knowledge of nature of instrument and project specific deficiencies.