The world’s huge infrastructure demand cannot be met by the public sector alone; private investors and operators are needed, but they worry about political and regulatory risk.
- Today, political and regulatory risk takes many forms – from community protests to tightened regulations and corruption – and is relevant in both developing and industrialized countries.
- A new report in the World Economic Forum’s Infrastructure Knowledge Series outlines actionable risk-mitigation measures to be taken by the public and private sectors, and in a multistakeholder effort.
New York City, 25 February 2015 – A new report, Mitigation of Political & Regulatory Risk in Infrastructure Projects, has been launched today 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. It 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 report, prepared in collaboration with The Boston Consulting Group, presents a risk-mitigation framework consisting of actionable measures to be taken by the various parties – some by the private sector, some by the public sector and some by the two sectors jointly. Further guidance is provided in the form of 25 international best practices from different infrastructure sectors. 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.
“The topic is a crucial one,” explained 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.”
The significance of the report is described by Bertrand Badré, Managing Director and World Bank Group Chief Financial Officer: “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. 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.”
The report was further 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,” he said. “Consider the strategy adopted by some private companies, of involving a public body as counterweight to the tendering government. 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 programme will prove even more productive.”
“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,” said Douglas L. Peterson, President and Chief Executive Officer of McGraw Hill Financial, and Co-Chair of the Strategic Infrastructure Initiative. “Reducing these risks can help unlock the private capital needed to bridge the global infrastructure financing gap.”
The report will continue to substantiate the globally acquired body of knowledge and experience into concrete measures that contribute to boosting strategic infrastructure development, including its dissemination through the B20 and G20.
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