Exchange Rate Risk: Reviewing the Record for Private Infrastructure Contracts
Author: Philip Gray and Timothy Irwin Date: 6/1/2003 (PDF, 200KB)
Over the life of a typical contract for an infrastructure project - say, 25 years - the value of developing country currencies is likely to fall substantially. Sometimes the decline is gradual, but sometimes it is precipitous. Many contracts have been structured so that taxpayers or customers bear the exchange rate risk. During crises the result has often been traumatic: governments breach contracts, adversely affecting their access to capital markets, or customers must bear large price hikes, undermining support for privatization. This Note tracks the record. A companion Note proposes better ways to manage exchange rate risk.