INTRODUCTION

An understanding of the macroeconomic environment of a host country for a project is crucial to the success of a project financing. It must be stable enough to encourage long-term investments by developers and loans by financial institutions; stability is a crucial element of project finance. Countries that enjoy stable exchange rates and inflation and predictable political environments are more likely to foster successful project financings, without the need for multilateral support.

Also, the roles of foreign investors, foreign lenders, the host government, and the World Bank with respect to the project must be clearly understood by the local electorate and political leaders. In short, a consensus must be established in the country to promote the stability and foreign investment required in a project financing. Further, the laws and regulations of the host country must reflect that understanding in a clear and predictable way.

POLITICAL CONDITIONS

Political risks in a cross-border project financing can emerge from several sources. Principally, these are

• the degree of political stability;

• government attitudes about foreign investment (whether through policies involving currency exchange, repatriation, taxation, private sector involvement in infrastructure (so-called privatization), or infrastructure need);

• the extent of government involvement in the economy of the host country; and

• the economic projections for the host country.