How business can bridge the infrastructure gap
The world is in urgent need of more and better infrastructure, and the sums that must be spent to narrow the infrastructure gap – an estimated $4 trillion a year – are far beyond what it is realistic to expect governments to raise in taxes.
This means we need private investment, but private investors are wary of the risks involved in committing money to projects that will bring returns over a very long period of time. How can we increase investor confidence, to end the capital stand-off and unlock the necessary funds?
Caution is understandable, because a wide range of political and regulatory risks can hit projects whose life cycle is longer than the political cycle.
For example, a future government could decide to impose new regulations or taxes, renege on commitments to pay, cut short a concession to operate an infrastructure asset, or even nationalise it outright. Private investors weighing these risks also have to consider the fact that judicial processes will not be efficient or effective in enforcing the original agreement.
These are not new challenges. They were discussed, for example, at the High-Level Panel on Infrastructure during the B20 and G20 in Cannes in 2011. But we have so far lacked a systematic framework for thinking about them, and about what both the public and private sector can do to tackle them.
A new World Economic Forum report, Strategic Infrastructure: Mitigation of Political and Regulatory Risk in Infrastructure Projects, aims to fill that gap.
First, we need to identify the root causes of political and regulatory risk. These include the way that perceptions of the public interest can change over time, as attitudes evolve on matters such as environmental responsibility; the nature of political systems, which make it difficult for a present parliament to circumscribe the sovereignty of a future parliament; and mis-perception by investors about the likelihood of public pressure mounting over an issue, and governments responding.
There is no silver bullet in balancing investors’ need for predictability with electorates’ need for flexibility. But sometimes rules can be defined that allow for flexibility in a predictable way – an example being Germany’s feed-in tariff for newly built photovoltaic plants, which automatically adapts according to the amount of photovoltaic capacity connected to the grid.
Passing investment stability legislation and offering constitutional guarantees are part of what governments can do. But these are not enough on their own – they need to be backed by credible agencies and a strong commitment to anti-corruption. There is also scope for bilateral investment treaties to play a greater role. Although many such treaties already exist, they are often under-used, in part because protection clauses can be vaguely written and arbitration procedures controversial.
Alongside government actions, the private sector could also develop a wider range of risk-mitigation measures. Many of the harder risks, such as assets being expropriated or local currencies becoming inconvertible, can be addressed though financial instruments.
Carefully considered ownership structures, such as joint ventures with local partners and multilateral development banks, can help to deter political interference. And the greater the degree of professionalism, sustainability and openness with which a company operates, the less likely public pressure for political interference is to materialise in the first place.
Addressing the infrastructure gap is vital if the world is to urbanise, continue to deliver economic growth, spread prosperity and meet the challenge of climate change. Mitigating the risks of private investment in infrastructure will be possible only with the public and private sector working together in genuine and transparent partnership.
Watch a session from Davos 2015 on Closing the Infrastructure Gap.
Written by Pedro Rodrigues De Almeida, Director, Head of Infrastructure and Urban Development Industry.
[Image: The 405 freeway looking southbound running underneath the 10 freeway is shown in this aerial photo in Los Angeles, California September 29, 2012. REUTERS/Gina Ferazzi]
--Future of Construction 14:51, 16 Jun 2017 (BST)
 Related articles on Designing Buildings Wiki
- 2050 and the Future of Infrastructure.
- 3 ways the world’s fastest growing economies can close the infrastructure gap.
- A better investment framework for Africa.
- Compact sustainable city.
- Industry Disruption: 10 ways real estate is changing.
- Is Disruptive Innovation possible in the Construction Industry?
- Our critical infrastructure is more vulnerable than ever. It doesn’t have to be that way.
- The future of green infrastructure.
- The key trends making our cities greener, safer and smarter.
Featured articles and news
BRE form partnership with software supplier Graitec to drive uptake of BIM.
Ever fancied exploring a unique Stalinist housing project in a Trabant car? This tour could be for you.
Recent legal case ends with a decision of great importance regarding student accommodation.
We could be on the brink of a demand revolution. But will the opportunities be seized?
Public sector can save £35 million on estates through new CCS framework.
BSRIA promote the government's new strategy to help strengthen the global competitiveness of British industry.
Have a read of our introductory guide to briefing documents for building design.
Have a look at Riga's most striking new building, the National Library of Latvia.
It's an exciting time for NEC users, but it can only succeed with openness and inclusivity between clients and contractors.
New designs revealed for Qatar World Cup 2022 stadium, based on traditional Arab headwear.
The results of the sixth large-scale cladding tests have been published - another failure.
Four practical tips to bring sustainability into your building design.