Modelling Country Reliability in Public Private Partnership Infrastructure Proejcts

Most Public Private Partnership (PPP) infrastructure projects especially in emerging markets carry a high amount of economic foreign exchange (FX) exposure. Risk mitigation instruments (RMI) are frequently implemented by governments to compensate FX loss in the Special Purpose Company (SPC). The experience of many investors is an underestimation of the risk that governments would refuse to readjust the contracts after or during a currency devaluation period. Therefore the value of the RMI depends on the affordability and the willingness of the government to compensate FX loss. Factors influencing country reliability can be identified in the government ability to repay debt obligations, liquidity difficulties and political difficulties. The overall objective of this paper is to analyze RMI instruments and to design a methodology to measure country reliability on RMI. The model has a dynamic framework which requires input data that are based on indicators and proxies. The focus however is on the micro-economic level. The purpose is to evaluate the impact of economic FX exposure on the cash flow of infrastructure projects designed under long term concession contracts. The methodology can be applied to support financial decisions and strategies in funding PPP infrastructure. Furthermore the outcome has an important impact on the evaluation of selected risk mitigating instruments (RMI) and the estimation of the necessary FX protection.