tion inevitably becomes weaker than it was when the Host Government first
wanted to attract the investment.
So just as a project has to be commercially viable (cf. §8.4), it must also be
politically viable. The fundamental issue is whether the project is beneficial to
the country; if it is not beneficial, e.g., because the cost of its product or service is
out of line with local costs, investors and lenders cannot just rely on Project Con-
tracts and ignore this political aspect. And a high rate of return, which is meant to
compensate for risk, may paradoxically increase the risk if it becomes politically
unacceptable.
The project also has to be set up in a way that leaves the Host Government in a
position to make future changes in the market in which it operates. For example,
if the state-owned power distributor is to sign a long term PPA, the Host Govern-
ment will have to consider whether this contract could be an impediment to a
future privatization of the electricity industry, and if so how it can be structured
to leave future flexibility in this respect.
More specifically, the Project Company may be subject to political risks relat-
ing to the project’s presence in a particular country and its relationship with the
Host Government, rather than to the commercial and financial risk aspects of the
project covered in Chapter 8 and Chapter 9. These risks are discussed in detail in
this chapter.
§10.2 CLASSIFICATION OF POLITICAL RISK
Political risks fall into three main categories:
Investment risks. The standard “investment” risks are:
currency convertibility and transfer (cf. §10.3)
expropriation of the project by the state (cf. §10.4)
political violence (i.e., war and civil disturbancealso known as political
force majeure) (cf. §10.5)
Investors and lenders into the country where the project is situated (the
Host Country) are likely to be concerned about these issues if the project is
located in a developing country that is politically unstable or has a lower
credit rating.
These risks may be passed on by the Project Company to the Host Gov-
ernment under a Project Agreement or Government Support Agreement, by
requiring the Offtaker or Contracting Authority (guaranteed by the Host
Government) or the Host Government itself to compensate the Project Com-
pany for losses caused by them. However when the time comes the Host
Government may simply be unwilling or unable to fulfill this obligation, and
some form of political risk coverage (cf. Chapter 11) may be required.
204 Chapter 10 Political Risks

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