Improving the Assessment of Economic Foreign Exchange Exposure in Public–Private Partnership Infrastructure Projects

Abstract

Unexpected foreign exchange (FX) rate changes represent an important risk factor, especially in public-private partnership (PPP) infrastructure projects in developing countries. The risk exists because PPP projects typically sell their outputs domestically and generate revenues in local currency, whereas their financing costs and operating and maintenance costs are denominated in major currencies. Multidisciplinary experience and engineering judgment are needed to control and manage FX exposure during construction, operation, and maintenance of infrastructure. In this context the paper aims to establish a quantitative model that is linked to engineering parameters and cost assumptions to quantify economic FX exposure in PPP infrastructure projects. First, the FX index terminology will be introduced, based on a first-order second-moment reliability method. Second, the methodology is illustrated on a PPP coal-fired power project in Southeast Asia. It is also shown that the proposed dispersion ellipsoid implementation is much faster in computation time compared with commonly used Monte Carlo simulations in PPP infrastructure projects.