Sovereign Risk? East West Link versus Adani

East West Link Protesters, 4 May 2014. Photo by Takver @Flickr CC BY-SA 2.0

Sovereign risk is where, for example, a business enters into a contract with a national government, and then the government changes its mind and ends the contract. Typically, governments would then pay compensation to the business to ameliorate the costs of responding to a government request, organising resources to meet the contract, and then losing the contract. This is very real sovereign risk and it happened in Victoria in 2015 when the East-West Link contract was cancelled. The costs to the Victorian Government soon began to mount.

But it didn't end there. Victorians had to pay even more. And there was the social cost of compulsorily acquiring homes, only to sell them back some time later to recoup costs.

If you were the business owner, you would expect compensation, and you might be wary of future contracts with government. Indeed, the Andrews Government's decision to end the contract received official complaints from the French and Spanish ambassadors.

If a government develops a reputation of being "risky", then future contracts will cost more, and compensation clauses will become heftier. This is sovereign risk and the ways that companies ameliorate that risk, just like the insurance industry would do.

Imagine you were the homeowner who did not want to leave, but were forced to do so, only to see your home later sold to someone else. Or else you saw an opportunity to use the properties for low-income housing, but instead these were auctioned off to cover the costs of compensation.

The point is, here we have all the hallmarks of sovereign risk and the political, financial, and social fallout that accompanies that risk.

But what about Adani's claim that Australia is gaining a reputation for an unacceptable level of sovereign risk? Is sovereign risk created when the government won't give you a loan of almost $1bn?

I don't think so.