Principles of Project Finance

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 ...