21
may
2014
infrastructure
investor
Structure
At the onset of your project, engage with
non-governmental organisation (NGO)
stakeholders; they will have local exper-
tise that they can share with investors and
liaise with local communities if required.
Engagement with multilaterals may
bring some benefits. The World Bank,
as a respected sovereign creditor, wields
considerable influence in the event of a
contractual dispute. Similarly, bilateral
investment treaties can also offer some
recourse, so check which governments
have signed up to bodies like the Inter-
national Centre for Settlement of Invest-
ment Disputes (ICSID).
Currency risk
Returns on infrastructure projects are
usually derived from tariffs levied on
the local population for service pro-
vision, which can be politically and
economically sensitive. Investments in
infrastructure projects are often made
in hard currency while payments for the
service provided are usually received in
local currency. This creates currency
inconvertibility and transfer risk in the
conversion and remission of foreign
currencies that host governments can
manipulate and control.
The Argentinian financial crisis of
2001 is a case in point. In response to
deteriorating economic conditions, an
Argentine court issued an injunction
preventing CMS Gas, a private com-
pany with a 29.42 percent share in a
joint venture gas infrastructure project
with the state-owned gas company, from
paying tariffs in dollars with an adjust-
ment for inflation. The case was taken to
arbitration for claims of expropriation
and discriminatory/arbitrary treatment.
The same injunction led to a number of
similar cases arising across the Argentine
gas sector.
Popular protests
In contrast to natural resources projects
which cater to the international com-
modities market, returns on infrastruc-
ture investments are reliant on revenues
being generated by the local population
through road tariffs, payment for power
usage and such like.
In all countries the cost of public utili-
ties is politically sensitive but in emerg-
ing economies where consumers are not
accustomed to paying for utilities and real
incomes are low, it is often a particularly
combustible issue – just think of the
large-scale protests which have been trig-
gered in recent years by attempts to cut
subsidies across the Middle East. When
pressure mounts in this way and govern-
ments are called upon to reduce energy,
water or public transport costs, private
contractors involved in the provision of
these services are left exposed to an array
of political risks ranging from political
violence, contractual agreement repudia-
tion/renegotiation and nationalisation.
The most lucid example of this is
the so-called Cochabamba Water War
of 2000 when inhabitants of Bolivia’s
third-largest city rallied against rising
water prices following the privatisation
of the municipal provider and ultimately
forced the authorities to repeal the pri-
vatisation law and rescind a private con-
sortium’s contract.
History was to repeat itself just five
years later when rural peasants and the
urban poor of La Paz and El Alto took
to the streets to protest the privatisa-
tion of their cities’ water supply after
prices were increased 35 percent by
the private contractor. As in the case of
Cochabamba, the Bolivian government
was forced to cancel its contract with the
private company.
In Puerto Rico, meanwhile, political
pressure to deliver affordable electricity
to the electorate has led the incumbent
government to renegotiate six Power-
Purchase Agreements (PPAs) which were
signed by its predecessor. The operators
of the solar power projects were accused
of driving up the cost of electricity on the
island until the Puerto Rico Electric Power
Authority (Prepa) renegotiated six PPAs,
shaving $63 million off its energy bill.
n
Elizabeth Stephens is head of credit and
political risk advisory at JLT Speciality, the
London-based provider of specialist insur-
ance broking, risk management and claims
consulting services
“When it comes to
investment, there is no
such thing as a ‘good’
or ‘bad’ country, just a
good or bad risk”
Elizabeth Stephens
RISK
