Private sector concerned about political, regulatory risk associated with helping meet global infrastructure demand: report

Beyond the public sector, private investors and operators are needed to meet the world’s huge infrastructure demand, but they are concerned about political and regulatory risk, suggests a new report issued this week as part of the World Economic Forum’s Strategic Infrastructure Knowledge Series.

Political and regulatory risk is one of the major constraints on infrastructure investment decisions, notes a press release Wednesday from the World Economic Forum, an international institution committed to improving the state of the world through public-private co-operation in the spirit of global citizenship.

Mitigation of Political & Regulatory Risk in Infrastructure Projects, prepared in collaboration with The Boston Consulting Group, notes that a prerequisite for sustainable and inclusive growth worldwide is a modern and efficient infrastructure. The required investment for reaching the optimal level is enormous, estimated at 5% of global gross domestic product (or $4 trillion) annually until 2030.

Given that this amount would be almost impossible for the public sector to raise on its own, the gap will need to be filled by the private sectors. But the private sector has concerns over political and regulatory risk “because an infrastructure asset typically has a lifetime much longer than political cycles, and the investors’ revenues and cost base depend heavily on regulation,” the report states.

Political and regulatory risk “takes different forms over an infrastructure project’s life cycle, from delayed construction permits and community protests to breach of contract, tightened regulations and the non-renewal of licences. In addition, some broader risks apply throughout the life cycle – changes to taxation laws, for instance, and endemic corruption,” the statement continues.

For example, the report notes, there are different risks during different phases:

• Planning/design/construction – risk of cancellation or change of scope, risk concerning environmental and other permits, and risk of community opposition;

• Operation – risk of expropriation, risk of breach of contract, and risk of asset-specific regulation;

• Termination – risk concerning the duration or renewal of the concession, risk relating to the transfer of the asset, and risk related to the decommissioning of the asset.

There are also risks affecting the sector or entire community, namely: risk of changes to the regulation of the industry; risk of taxation changes; risks associated with currency transfers and convertibility; judicial risk; and risk of corruption and market distortion.

The report presents a risk-mitigation framework consisting of actionable measures to be taken by the various parties, including the private and public sectors separately or jointly. “The framework enables policy-makers and companies to take a holistic view of the potential levers, and, hence, to undertake a comprehensive effort to mitigate political and regulatory risk. Further guidance is provided in the form of international best practices from the different infrastructure sectors surveyed in this report,” it adds.

“Investors and operators could seek political-risk insurance, for example, and companies could deter government intervention by carefully crafting ownership and commercial structures. On the public-sector side, the national government could provide investors with protection by offering constitutional guarantees – for instance, by ensuring fair and fast dispute-resolution mechanisms, and by enforcing robust anti-corruption policies,” notes the forum press release.

“The report summarizes the impact that the different political and regulatory risk factors have on projects, and cites a wide range of examples that help explain and underpin the need for risk-mitigation tools,” Bertrand Badré, managing director and chief financial officer of the World Bank Group, says in the statement. “Importantly, the report confirms that these types of risks are encountered across a wide range of geographies; this is not a developed versus emerging economies issue,” Badré says.

The report was endorsed by John M. Beck, executive chairman of Aecon (Canada) and a global co-chair of the Strategic Infrastructure Initiative. “Many of the solutions listed are of proven value,” Beck says.

“In the Quito Airport case, for instance, the involvement of the Canadian government helped us to speedily resolve our differences with the Ecuadorian authorities. If the report succeeds in conveying all its innovative ideas to the right quarters, the great global infrastructure program will prove even more productive,” he adds.

“The topic is a crucial one,” says Pedro Rodrigues de Almeida, director and head of infrastructure and urban development industries at the World Economic Forum. “Unless we agree on a common language to categorize the specific types of political and regulatory risks, it will be impossible to raise awareness of the opportunity to invest in the infrastructure sector. The framework developed for risk mitigation puts in evidence the main levers that can be adjusted while eliciting the white spaces where multilateral development banks, commercial banks and insurers can create much-needed risk-mitigation instruments.”

Douglas L. Peterson, president and chief executive officer of McGraw Hill Financial, who co-chairs the Strategic Infrastructure Initiative, notes that “in order for investors to confidently increase their investments in infrastructure, they need to see transparent and comparable data and processes, as well as predictable legal and regulatory frameworks that can withstand political risk.” Adds Peterson, “Reducing these risks can help unlock the private capital needed to bridge the global infrastructure financing gap.”

The report notes that “a government can turn projected highways, power plants and other infrastructure assets – urgently needed for a country’s economic progress and the population’s welfare – into reality by resolutely addressing and reducing this risk, and, thereby, encouraging investment.”

“Many, if not all, of the various measures, must be adopted in order to reinforce and complement one another. The framework developed in this report duly encourages a holistic perspective: users can ‘check’ each lever in turn, guided by internal best practices, and decide whether it needs improvement,” it adds.