Report
How to Deal with Exchange Rate Risk in Infrastructure and Other Long-Lived Projects
Policy Research Working Paper, Vol.10568
World Bank Group, International Finance Corporation
09/19/2023
Abstract
Most developing economies rely on foreign capital to finance their infrastructure needs. These projects are usually structured as long-term (25–35 years) franchises that pay in local currency. If investors evaluate their returns in terms of foreign currency, exchange rate volatility introduces risk that may reduce the level of investment below what would be socially optimal. This paper proposes a mechanism with very general features that hedges exchange rate fluctuation by adjusting the concession period. Such mechanism does not imply additional costs to the government and could be offered as a zero-cost option to lenders and investors exposed to currency fluctuations. This general mechanism is illustrated with three alternative specifications and data from a 25-year highway franchise is used to simulate how they would play out in eight different countries that exhibit diverse exchange rate trajectories.
Details
- Title: Subtitle
- How to Deal with Exchange Rate Risk in Infrastructure and Other Long-Lived Projects
- Creators
- Luciano de CastroClaudio FrischtakArthur Rodrigues
- Resource Type
- Report
- Publication Details
- Policy Research Working Paper, Vol.10568
- Publisher
- World Bank Group, International Finance Corporation
- Number of pages
- 51 pages
- Language
- English
- Date published
- 09/19/2023
- Academic Unit
- Economics
- Record Identifier
- 9984473763002771
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