Publication: Exchange Rate Risk : Reviewing the Record for Private Infrastructure Contracts
Date
2003-06
ISSN
Published
2003-06
Author(s)
Abstract
Among the key risks facing foreign
private entities investing in the infrastructure of
developing countries is depreciation or devaluation of the
local currency. Indeed, over the past 25 years developing
country currencies lost 72 percent of their value relative
to the U.S. dollar on average-and about a fifth lost more
than 99 percent of their value. Sustainable private
investment in infrastructure depends on addressing this risk
well. Private infrastructure contracts in developing
countries have usually passed much of this risk on to
customers or the government. But because devaluations and
large depreciations in developing countries often occur in
the context of macroeconomic and financial upheaval, such
risk allocations cannot always be made to work. The
difficulty arises because the contracts raise prices
precisely when the economy is suffering the most. If the
government bears the risk because a state-owned utility is
purchasing power from an independent power producer at
prices denominated in U.S. dollars, for example, a contract
will require steep increases in local currency prices just
when the utility ' s revenues-and those of its owner,
the government-are likely to be declining.
Citation
“Gray, Philip; Irwin, Timothy. 2003. Exchange Rate Risk : Reviewing the Record for Private Infrastructure Contracts. Viewpoint. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/a3811fd9-41c8-5867-9147-c57428adeaa5 License: CC BY 3.0 IGO.”
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