ASi" kUCTURE FlOR DEVELOPMENT

financial covenants are made. In such situations, ance market is to provide- insurance for traffic risk
:--::.commnexial banks have a much greater incentive fora Mexican tol road.
for supervising projects than do lenders backed by
sovereign guarantees. SECrOR POucy-wIuc mIC. S Especially impor-
-The evidence, although limited, shows that the tant issues arise in the power sector because project
assumption of cost-related risks by private sponsors sponsors focus on the credibility and solvency of
and the monitoring of performance by banks are ef- their buyer,- typically a government utility that
fecive. Evidence, for exanple, on private construc- transmits and distributes power. The instrument
tion is very favorable and reflects the tight contrac- that protects the power supplier is the "take-or-pay"
tual conditions and severe penalties for cost and contract, or power purchase agreement Under such
time oveuns. A preliminary review of the FC's in- a contract, the buyer agrees to pay a specfied
frastucture projects shows that time overruns in amount regardless of whether the service is used.
construction have been only seven months on aver- The government thus provides a contract comphage,
and cost performance has been about on target ance guarantee-a useful transitional measunre
Such performance, however, is possible only when while the long-term goal of sectr reorm is being
commercial risks are truly transferred to private addressed (Box 5.8).
sponsors. The Mexican toil-road example shows Similar concerns arise with water and other envithat
when nsks can, inpractice, be transferred back ronmentat infrastructure projects (such as water
to the government, incentives for performance are supply, wastewater treatment, and solid waste disgreatly
weakened.
posal operations that are typically carried out at the
Private investors may wish to insure themselves municipal level by a local monopoly). Here governmagamist
commercial risks. The provision of such in- ment agencies (or municipal authorities) are not the
surance is best left to the private sector, although direct purchasers of the service. But they can and do
governments have a role in stimulating domestic influence the ability of the service provider to meter,
-guaranty facilities, possibly by taking an. initial bill, and collect Where the municpal authorities
stake in guaranty funds (Box 5.7). The private mar- cannot deliver, collection guarantees from the cenket
for risk insurance for international transactions tral governmentarerequired.
is small While short-term insunce for trade credit Thus, in such projects, the "market risk, or the
is available, pnivate insurance for infrastructure risk arising from fluctuations in demand, is effec-
.- - projecs is uncommon, although the London insur- tively transferred to the government through the
Box 5.. Leveragigthrough guarantees in Thailand
To encouTage private lndin the Thai government is zopolitan Region, and Bangkok ilseif are expected to be
--deveoping the Thai Guaranty Facility to gurantee the primary benefidaries of loanguarantees for investokans
made by prvate financial institutions to munid- ments in wastewater ttm ent, solid waste collection.
-palities and private operators of urban envital and disposal, and potable wate supply.
infrastuctu;m The facility is planned as a pubi-private During its-first two years of operation, the guaranty
corporation with prvate sector munagemL The tge facility is expected to recive $75 million. Lending will
date forinitial operation of thefacility is June l99t4 be five to eight times the level of these guarantyr funds.
-Because of limited experiencein lending to mwnii- Over a five-year. period, it is prjected tat the fility
polities, financal institutions consider them risky bor- will.be fiuded at a level of S150 million and will leverrvowers.
Pehrceivig igh project risks, lenders are reluc- age up to $12 billion in loans for urban environmental
tant- to malke loans for periods of-longer than eight infrastructure. projts It will obtain rpources princ-
. years-too short tD recoup investment from envirn- paily fhm the Thai governt om money borrwed
mental inhastrucht:..
in part from the USAID Housing Guaranty Potgram and
By pmrviding guarantees to private operators and in part from Thai finanal imstitutions. -
-nmunicipalities that help them to secure loans from Cont- A setof policy initiatives is also beingestablished to
- meial lenders, the g rens guaranty facility wMil ensure the effectiveness of this facility, including a move
create longer-term financg With increased lending to toward the "poluter-pays" priridpk change in adminlocal
govemnment it. will soon be posble to establish : istrative procedures, and greaterdecentralization, of
: credit ratings fbr dtiesand to allow them toissue bonds. decisionmadg.- .
Ten provincil dities, the five cities of the Banok Met-
I*.