Infrastructure Project Finance and Capital Flows : A New Perspective

The market seems to impose a high-risk premium on infrastructure loans to countries with high inflation and to projects in the road sector. The success with which middle-income indebted developing countries have gained access to private international finance in the 1990s is a tribute to their own domestic economic performance, international policy in dealing with the debt crisis of the 1980s, and innovations in international financial markets. Emphasizing the role of private infrastructure investment as a vehicle for attracting foreign capital to developing countries in the 1990s, Dailami and Leipziger develop an analytical model to examine what determines the credit-risk premium on infrastructure projects in the country-risk environment of developing countries. They also provide tentative quantitative evidence of the importance of macroeconomic and project-specific attributes of project risk. Their key finding: the market seems to impose a high-risk premium on loans to countries with high inflation and to projects in the road sector. This paper - a product of the Regulatory Reform and Private Enterprise Division, Economic Development Institute - is part of a larger effort in the institute to expand best practice, knowledge, and learning in the infrastructure finance area. Mansoor Dailami may be contacted at mdailami@worldbank.org