Foreword from the World Bank Group
Trillions of dollars are needed to bridge the infrastructure gap, $4 trillion per year until 2030 according to this report. The enormity of the numbers discussed must not and cannot inhibit tackling the task at hand. The possibility and the consequences of failure will have a multi-generational impact. However, dismantling the single dollar requirement into its components is critical in order to make progress. This report provides a valuable contribution to the continuing analysis and progress of this issue by setting out the areas of certain risks and the potential mitigants. It unboxes the various elements of political and regulatory risk in infrastructure projects and identifies factors which need to be harnessed in order for investment to flow more efficiently and in greater volume.
It can be an easy argument for certain market participants to push readily the responsibility of solving the problem on to either the private sector or the public sector. Of course, the reality is far from being so easy or simple; it cannot be just one or the other. Genuine, transparent partnerships are the only way to unlock the capital stand-off. Through joint ownership, be that co-financing or other shared mechanisms, we can align better the roles and incentives required to ensure that robust, transparent and reliable processes and procedures are in place together with a judicious set of checks and balances. With the greater certainty that this approach can bring, other elements such as pricing and risk parameters can be refined so that greater investment flow can be encouraged.
It has been well documented that public sector money alone cannot bridge the gap. The imperative needed to bring in private sector capital is clear. We have a window of opportunity. Infrastructure investment is in many ways the key needed to unlock much needed growth. At the same time, it also offers yield and diversification to institutional investors who are central to the new finance paradigm.
To address some of the barriers which have historically restricted the level of private capital flow into infrastructure, the report highlights the importance of dissecting the different risks. By addressing each of the key risks and formulating a public-private joint approach, where appropriate, the pieces can be put in place to provide feasible levels of protection. The report summarises the impact that these different political and regulatory risk factors have on projects and cites a wide range of examples which help explain and underpin the need for risk mitigation tools. Importantly, the report demonstrates that these types of risks are encountered across a wide range of geographies as well as a wide range of types of economies; this is not a developed vs emerging economies issue. The report does a good job in seeking to view things from a balanced perspective. It examines the flaws and presents interesting angles on how these can be addressed, given the inherent complexities.
Further, the report proposes an interesting approach to put a framework around the different permutations of risk through the risk mitigation framework, which pulls together many of the key components. Whether it is robust regulation and contracts, stability of law or reliable dispute resolution mechanisms for the public sector and effective and constructive interaction with the public sector, inclusive community engagement or responsible business conduct for the private sector, the report highlights a pragmatic overview of possible ways forward. By managing perceived and actual risks as well as the impact these have on return expectations, a cohesive way forward can be found.
As someone who has been in the midst of many discussions concerning infrastructure investment, the market failure, the large financing gap and the unbundling of the problem of mobilizing private sector investment in partnership with public sector capital, I know how critical solving this conundrum is. Indeed, it is our duty and responsibility to resolve it.
I am grateful to this report as it contributes to marshalling our energies and provides a solid basis from which to continue to progress the assessment and, crucially, the implementation of the necessary steps.
Managing Director and World Bank Group Chief Financial Officer,
World Bank, Washington DC