ASi" kUCTURE FlOR DEVELOPMENT

change risk through the passing on of forward- example, to transfer construction risk to specialized
cover premiums.
construction companies through turnkey contracts
Also, sponsors may enter into longterm contracts
CoMMERaAL RISK. Two types of commercial risk with input suppliers.
may be distinguished, those relating to costs of pro- Where sector policy concens are unimportant,
duction and those arising from uncertainties in de- investors also accept market risk, but progress in
mand f-ur services. Substantial progress has been this regard has been slower. Tariffs in line with
made 'in shifting cost-related- risks onto private costs, sector unbundling to permit new entry (as desponsors
and other. private parties. Typically, con- scnbed in Chapter 3), and access to transmission
tracts include bonuses for early comnmissioning of networks are required in order to enable private
the project and penalties for late completion. In a sponsors to .assume all market risks. In telecommuproject
to construct a power plant in India, the pri- nications projects, the market risk is typically bome
vate sponsor will pay a penalty of $30,000 every day by the sponsor In the electric power and water sec-.
beyond the agreed commissioning date for the first tors, on the other hand, limitations on assumption
six months and a higher penalty thereafter A fixed of market nsk arise because payments to cover costs
payment for overall capacity also shifts the risks of. are not assured. Also, governments need to decicost
overruns to he pnvate sponsor. A contract may sively eniinate the prospect that investors will be
also specify operational obligations, such as mainte- bailed out if circunstances are unfavorable. In
nance or the availability of capadcty In the case of transportation projects, such as Mexican toll roads
utilities, a power or water supplier is sometimes pe- and certain Argentine rail concessions, governnalized
for capacity availability below prespedfied ments permiitted revisions in contract terms when
levels (see Box 5A on the Guatemala power plant). traffic levels were lower than expected.
Or the contract may require that a plant be available Assumption by private parties of even cost-rein
effective working order for a specified period of lated risks creates incentives for god perfortime.
mance. Not only do sponsors have equity holdigs
F-roect sponsors, are able to transfer some of in the project, but lenders are also central to the
these risks to other private parties. It is common, for monitoring process. As part of the contract, several
BaxL5.6 Mexico's toil roads: a big push that faltered
In:-as=uctre projects are often assocated with tine With tols that high taffic flaed to mtiali-the
construction outlays that result in limited productive old,feexoadswerepreferredevenwhetn travel timewas
use. This can ocu as much underprivate as under pub- typically twice as lon& Moreover, cost overnus aver-
.I entewprise if the right incentives are notin place. aged more than 50 paent of projected costs. Crhe High-
. in prexpartion for an ambitious 6,00-kilometer road wayof the Sun, from Cuemavaca to Acapulo, for examr
program, a-Meican government agency.did hasLy traffic ple, cost $251 billion, more than twice the orginal
and cost projections and prepared the road designs. The estimate.)
quality of these estiiates and designs fell fr short of re- To remedy the situation, the Mexcan govement
quirements for such an underaldng. At the same time, has taken several steps. in many cases, concession pen-t.
.- stat-owned banks lending to toil-wad prjcts did not ods have been extended fom ten or fifteen years to
perfrm the normal project screening and appraiua - thirtyyears VWherepintventuresoffr greater prospects
Although the concessions for road construction and of financial viablity, srethes of toll road amebeing coroperation
were awarded based on several criteria, in- bined under single management Heavier vehides nay
vestors who- promised to transfer the roads back to the be:bannedfrom the old road network as weight limits
- goverment intheshortst time werpeaallyfavored- are imposed and enforced.
Short concessions were partly motivated byia concern There are,signs that the most difficult period is past
that only short-term finandng would be available. The In the long run, consolidations of toll roads, longer con1-
attemptto achieve sucess.within a newadministratioirs cession periods, and more realistic trafficand costprojeterim
also creted a sense of ugency. In btrn, investors tions, along with economic grwth a n :
negotiated toa rates that would earn a retirn within the re spon bility on the partof thep
concession period. Tolls typicaly were therefore five to should bring significant retums on i-
ten timhes hger than those in the United States for cor- investment
parable distances.
S--- ~ .~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~9