4. ANÁLISIS E INTERPRETACIÓN DE RESULTADOS
4.2 Discusión
The risks for both the public and private sectors investing in agricultural infrastructure are many and diverse. Box 3.8 catalogues some of these85, divided into risks relating to the construction of capital
assets, service delivery, market factors, and economic and political risks.
Box 3.8 Risks to Investment in Infrastructure for Agricultural Development Construction of Capital Assets
Design risks (private party’s design may not achieve the required specification) Regulatory delays
Financing delays, eg to complexity of financial package to manage risks Delays in mobilising materials and men into remote rural areas Completion risk
Cost overruns, eg owing to weather
Utilities risk – the risk that required public utilities and services (eg electricity for irrigation, or rural feeder roads for an agro-processing facility) are not sequenced in sufficient time
Operational Phase (Service Delivery)
Latent defect risk, important for the upgrading of existing infrastructure Poor technology and equipment performance
Input unavailability, worsened in remote rural areas due to transportation constraints Management quality deficiencies
Cash flow risks Debt service risks
Extended maintenance downtimes/unplanned stoppages, leading to complaints from customers and reduced user fees Market Factors
Insufficient or volatile demand
Over demand – infrastructure unable to meet demand, creating dissatisfied customers, congestion (eg on transportation routes and approach roads to agro-facilities)
Late payments by users Non-payment by users Economic Risks
Credit risks, ie risk of non-payment by borrower to lenders Unavailability of affordable short-term financing (working capital) Fluctuations in interest rate on debt
Currency convertibility and foreign exchange rate change (eg devaluation), relevant if hard currency financed Inflation in construction or operational costs not matched by inflation in user fees or subsidies, particularly relevant if
investments concentrated in the same geographic region at the same time Political Risks
Regulatory and contractual risks, including breach of contract, changes in law, license requirements, approvals and consent not obtained or result in additional costs, imposed changes in tariffs, different rules for foreigners, restrictions on operations, obstruction in the process of arbitration
Expropriation, nationalisation or confiscation of privately owned assets, with a ‘pittance’ payment Non-neutrality of legal system, including dispute resolution
Political ‘cross-fire’ risks, eg anti-privatisation of water and electricity Local public hostility, eg tariff rates, social or environmental impacts War and civil disturbance
3.3.1 Risk Transfer to the Private Sector
The commercial and political risk profile of agricultural infrastructure projects is a key constraint to participation by the private sector. These risks are likely higher the more remote the location, the lower the population density and incomes, the more inefficient or politically fragile the government institutions, and the less well developed the local capital markets and infrastructure supplier sector.
The risk profile is different for different types of rural infrastructure. On balance, mobile network telecommunications may be comparatively less risky, with lower capital and maintenance costs, a willingness of users to pay for cost recovery, and shorter time periods to turning a profit. Irrigation works
for smallholders, covered wholesale markets and telecommunication base and relay stations have high capital costs and thus require prolonged periods of cost recovery, increasing the commercial risks.
3.3.2 Risk Mitigation
A critical challenge for the state and donors is to find risk mitigation strategies, financial or non-financial, which increase the ‘appetite’ of the private sector to take on commercial and political risks over a sustained period. Two of the examples discussed in later sections of this report offer a contrast in risk mitigation options. The commercial viability of the Siongiroi Dairy Plant PPP in Kenya (see Section 7.1) is challenged by seasonal climatic uncertainty. To mitigate this risk and attract the private sector, the state provided an initial capital grant subsidy to attract private investment in the milk processing facility. This had the effect of reducing the borrowing requirements of the plant company, while concurrently transferring the risk of servicing the remaining capital debt to this private party. Arguably, such residual risk transfer incentivises Siongiroi Dairy Plant Ltd to maintain a strong focus on cost efficiency and performance.
In contrast, in the Nile West Delta Irrigation Project (Section 5.2), no capital grant subsidies were forthcoming. Instead, 85% of project capital costs were drawn from a concessional World Bank loan to the Egyptian State, and made available to the project operator. In return for avoiding an upfront public expenditure commitment (a grant to the project operator for example), the state has thus taken on the main credit risk, as well as possibly an elevated political risk because the private party is less incentivised to achieve cost efficiencies and performance levels.
These two examples illustrate the choice of public sector concession planners between capital subsidies and credit risk retention, and invite the question of how the state can simultaneously attract the private sector into high-risk agricultural infrastructure projects, and yet also incentivise them to achieve cost efficiencies and high levels of service quality. These choices are discussed in more detail in Section 5.2.3.
Table 3.1 provides a generalised division of risks between private and public entities for business services and local infrastructure PPPs, based on an EU Phare programme in Bulgaria86. The literature
offers a range of financial and non-financial risk mitigation instruments relevant to PPP projects (see Table 3.2).
Table 3.1 Generalised Allocation of Risks between Public and Private Entities87
Risk Public partner Private partner External to PPP
Income Monitor Assume risk
Partner choice Assume risk/Monitor N/A
Construction Monitor Assume risk
Operating Monitor Assume risk
Financial Monitor Assume risk
Regulatory Assume risk N/A National legislation
Political N/A N/A National government
Risk Public partner Private partner External to PPP
Asset/Latent defect Monitor Assume risk
Public acceptance Assume risk Assume risk
Sustainability Monitor/regulate Assume risk Consumer regulatory body
Table 3.2 PPP Risk Mitigation Instruments for Attracting Private Parties into PPPs88
Risks Financial risk mitigation instruments Non-financial risk mitigation instruments Political risk Political risk insurance cover, either
specific or in a credit guarantee, eg B loans
Civil society organisations directly involved in the PPP design, construction and/or service delivery and operations
Credit risk Partial credit guarantees, partial loan guarantees
First-loss partial credit guarantee, designed to raise credits to ‘investment- grade’
Joint ventures with local supplier firms
Devaluation risk Use of local currency finance Local currency guarantees Devaluation liquidity schemes and facilities
Commercial risks Partial credit guarantees Short-term capital cost recovery financing strategies
Subsidised user fees
Output-driven performance standards
Regulatory and
contractual risks Breach of contract cover Financing and risk financing from multi-lateral development banks
3.3.3 Parameters of Risk Mitigation
A number of key parameters define the characteristics of risk mitigation instruments, as follows89.
Beneficiary – the party who signs a guarantee or insurance contract with the third-party provider. The beneficiary may the project sponsor; or a debt provider (eg a lender or bond investor concerned with the credit risk of the borrower, and wanting coverage against debt service default losses); or an equity investor desiring protection against investment risk and wanting coverage for investments made, or equity returns.
Risk type covered – essentially, there are two types of risk coverage: commercial risk and politicalrisk. Both forms are relevant to guaranteeing against defaults on the repayment of debt (credit risk) and on losses in the value or anticipated returns on investments (investment risk). Some risk mitigation instruments look at the ‘cause’ of the default on debt servicing or investment losses, such as a commercial risk event (eg cost overrun) or a political risk event (eg social disturbance). Other instruments focus on the ‘consequence’ of the risk event (eg the resulting fall in cash flow, or failure to meet final principal ‘bullet’ payment or last few principal and interest payments), irrespective of the cause. The partial credit risk guarantees offered by DFIs such as the International Finance Corporation are a case in point.
Export Credit Guarantees – a special case of partial credit risk guarantees, designed to cover
home country. Export credit guarantees or insurance cover some percentages of both political risk and commercial risk (together termed comprehensive risk guarantee or insurance).
Extent of risk coverage – some instruments cover only a portion of the total debt service defaultor investment loss. The aim of partial risk coverage is to promote risk sharing between the third- party guarantor or insurer and the lender, equity holder or project sponsor. For example, risk sharing between the guarantor and the lender may be 50/50, or biased towards one or other parties up to a certain threshold.
Interaction between 2nd and 3rd Party Risk Mitigation – the high risks and low investment returnsassociated with many forms of agriculture-orientated infrastructure means that lenders will seek to mitigate against these through higher interest rates and shortened maturities. 200-500 basis points above the base lending rate are not uncommon for such projects. DFIs that offer longer maturities or ‘junior’ debt may elevate their loan rates even higher in compensation. What third-party risk guarantees and insurance do is to improve both the borrower’s access to the financial markets and the terms of its commercial debt, ie the interest rate and length of maturity.
The key parameters of risk coverage are summarised in Figure 3.10 Figure 3.10 Key Parameters of Risk Coverage90