ASi" kUCTURE FlOR DEVELOPMENT

Box 5.5 'Land grnsand-eminent domain
Land gants have proved to be a valuable form of collat- delay infrastructue projects substantially-some of the
eml for innovative projects that might otherwise not difficuldes of the Second Stage Expesway in Bangkok
have been financed because lenders had little experence are related to these delays- Not only is an apprpriate
with similar pr-jects But in implementng a poicy of law of eminent:domain required to define the terms
land grants, there is a rsk ithatihe grants might be under which the governmet can acquire the land, but,
wasted if teyaregiven to projects that would be built in -as was demonstrated in the case of Narita Airport outany
case-
side Tokyo, lack of sensitivity in implementation can
Overall,' howeve,land grants have greater merit lead to contentious and expesive delays.
than interest guarantees because they represent a. one- In anticpation of land being acquired, landowners
-time inhfsion of resources-and do not reduce the incn- have an incentive to overdevelop their property or unfives
for efficient operation of the project. They may be dertakeothermeasures to overvalue their land. A prdCtiespeciallysuited
frmorespecative projects-suCh as cal solution is to use prevailing market prices and comldgh-speed
rail in industal couneries or high-risk trans- munity standards of land development as a norm. 'Me
-portisnent in developing cotnmties, more difficult issue is one of compensating those whose
Awarding land grants raises complex questions property values fai as the flow of business activity
-aboutacquisition proceduresand compensation of land- changes because of new infrastructur development In
holders Land acquisition can te. several years and: geeraL govenmnents have notcompensted such losses.
Authori hAve dls frs ove Le lee of to--s
Autorityhavedisag,Wfirsteoverelevelof tols vate parties. Four kinds of risks can be distinthey
had agreed on and then (more seriously) over guished-crency, commercial, policy-induced,
X -- who has the right to operate the road. Delays arising and country-although the distinctions namong
from these conflicts and frm sIow land acquisiton them are not always dear-cut
. have affected the viability of the Don Muang Tollway,
intended to link the Second Stage Expressway. CURRENCY RiSK Much ecent, privately financed
to the airport . ifrastructure has drawn an foreign capital and
The lesson for toll roads, as for electric power, therefore faces the risk of local currency devaluamay
be that contractual uncertainties arebestironed tion. Interational lenders rarly assume such risk,
out in smaller or simpler projects. Argetina has de- prefering instead to denominate their repayments
veloped an extensive system of private concessions in foreign currency terms. En the past, public enterin
which tolls are charged to finance maintenance. pnses or goverxunents have borne the currency risk,
There was an inial outcry against tolls on existing . but in the growing move to private finance, the risk
roads, and charges had to be lowered-but the of curency depreciation falls on the project sponsor,
greatly improved quality of the roads has made tolls and ultinately on the consumers of the service. In
more acceptabIe. En the state of Madhya Pradesh in many recent private projects, service prices have
India, an US-lkilometer tol road linkng an indus- been linked to an international currency
trial park to a national highway was built at a cost of Independent power generation presents a special
- $2 million and commissioned in November 1993. case Although most power projects do set their
The enabling legislation put in place and the finan- charges in US. dollars, these charges are paid by the
cial mechanisms used are being adopted and re- tran sion utility, and the final consumer is often
fined elsewhere in the country.
charged local cunrency prices untied to movements
in exchange rates. Transmission utilities cannot be
-* Riksharingr thelessowns lirned
expected to continue to bear currency risk in the
long run.i
At the heart of project financing is a contract that Countries may wish to promote schemes for inallocates
risks associated with a project and defines suring against cuny movements (forward
the daims on rewards- While often the cause of cover) so as to allow for short-term risk manage
delay and heavy legal costs, efficientrisk allocation menL In Pakistan, for example, the central bank ofhas
been central to- making projects financeable fers forward cover at an average premium of 8 per-.
and has been critical to maintamiing incentives to cent In time, private financial institutions may offer
- ; . . perfomL Risks are divided not only between pub- similar schemes- However, even with these anange
lic and private entities but also among various pri- ments, the consumer pays at least in part for ex-
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