5. The Way Forward
Modern infrastructure is crucial for economic development. It boosts inclusive growth in developing countries, maintains prosperity in the developed world and ensures a more sustainable and less carbon-intensive economy worldwide. One of the strongest impediments to increased infrastructure investment is political & regulatory risk, a major disincentive to private investors. 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.
Political & regulatory risk comes in many different forms and has a range of remedies, as outlined in this report. Figure 18 maps the mitigation measures onto the various risk types.
While the impact of any measure clearly depends on its exact specification, the mapping conveys the clear message that no silver bullet and no single overall remedy exists. Specific individual measures – international investment agreements, say, or risk insurance policies – might serve very effectively to mitigate specific risks, but they will have no impact at all on other types of political & regulatory risk. And, many private-sector measures might have a broad effect, but will make their impact only indirectly. Therefore, 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 international best practices, and decide whether it needs improvement.
Figure 18: Mapping of Risk Types and Mitigation Measures
Source: World Economic Forum, Boston Consulting Group
Imperative for action
Mitigating political & regulatory risk enough to boost private-sector investment is a huge challenge, and will take a dedicated effort by all stakeholders involved.
The public sector, being responsible for setting the regulatory framework, should carefully evaluate which risk types are most important, and continue working on measures that address those risks (see Figure 18).
The private sector should maintain or intensify its engagement. Certainly, companies and investors will want to continue assessing the political & regulatory risk very carefully (i.e. the likelihood and impact of adverse decisions) before committing to a project.120 In doing so, they should consider the available risk-mitigation measures described in this report, and should help to build a culture of open dialogue beyond specific projects.
The international community might want to consider enhancing multilateral measures, for example by broadening the availability of guarantees to fill the “white spaces” in the political-insurance offerings, or by developing further international investment agreements. The standardization of infrastructure securities is another area that might need enhancement.
A balanced and conducive regulatory environment with low political & regulatory risk is not something that can be created overnight. It will emerge only through a sustained and cooperative effort from all stakeholders. The effort will be worth it, however, by narrowing the infrastructure gap and thereby benefiting society at large.