Infrastructure projects often require land provided by a host government. This is usually granted through a concession, where the government grants usage rights for a set period. After the concession ends, the project and the land are returned to the government.
Concessions are a crucial element for mitigating political risks. A sovereign government has the power to make and repeal legislation as it likes. The risk to lenders is that, at some point during the project, the government may decide to expropriate, nationalise, or otherwise interfere with the project. This is a particular risk when the project is generating the revenues forecast for loan repayment, as it means the revenue streams destined to repay the project loans are diverted to the coffers of the host government.
Concessions are typically granted for the life of the loans. Major projects can take two or three years to build and commission. Then, it can take between ten to fifteen years to repay long term project loans. These long term loans are often only available from the development finance community of bilateral institutions. For example, the national development banks of European countries like FMO of the Netherlands and Proparco of France, and multilaterals like the World Bank and the African Development Bank.
National and multilateral lenders as a risk mitigation factor
The presence of national and multilateral lenders is a significant risk mitigation factor. Very often, developing countries receive support from the World Bank, IMF, and the like. As such, it would not do them any good to interfere with a project financed in part by one of those development institutions. This influence is strengthened by the World Bank’s close ties with governments in developing countries.
The specific terms of the concession will include rights and remedies against a government in certain circumstances. These rights will normally include waivers of sovereign immunity and the consequent right to sue for losses in the courts. Lenders, not being part of the concession, seek direct agreements with governments or project sponsors for similar rights.
There are other ways to mitigate political risk in a project, including insurance. But, the concession is a solid starting point for both this and project bankability.
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