GENERALLY

In any project financing, whether domestic or transnational, the project is subject to governmental jurisdiction and action. This can result in risks to the project that, if realized, affect the success of the project, cash flows, and operating costs. There are limits on the control a project sponsor can have over the political stability surrounding a project. Nonetheless, mitigation techniques do exist.

The degree of political risk the project faces is sometimes determined by the nature of the project. Projects of particular importance to a host government's social welfare strategies might be less susceptible to many political risks described in this chapter. In contrast, projects significant to the country's security or basic infrastructure might be more susceptible to certain political risks, such as expropriation.

More subtle, informal factors also influence the seriousness of political risk. For example, the involvement of the World Bank or regional development banks in a project might convince a host government to consider more fully the implications of any political action against a project, and use it less frequently. In addition, involvement by host-country lenders and investors, or lenders and investors in other countries with material stakes in the project's success, might have a similar effect. The possibility of jeopardizing these relationships can be sufficient to protect the lenders and the project sponsors from many risks discussed below.

Allocation of political risks and mitigation of those risks are possible in several ways, as further discussed in this chapter.