One 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 (GDP) (or $4 trillion) per year until 2030 – an amount that the public sector would find almost impossible to raise on its own. The gap will have to be filled by the private sector, but private investors are cautious when it comes to large and long-term infrastructure investments. In particular, they are concerned about political & 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.
Political & regulatory risk has many facets
During the different stages of a project’s life cycle, infrastructure projects are exposed to very different types of political & regulatory risk. Among the risks are, for example: during the planning and construction phase – delayed construction permits, and community opposition; during the operating phase – changes to various asset-specific regulations, and outright expropriation; towards the end of a contract – the non-renewal of licences, and tightened decommissioning requirements. In addition, some broader risks apply throughout the life cycle, and can affect an entire infrastructure sector (or even the entire national economy) – changes to sector regulation or taxation laws, for instance, and endemic corruption. To address all these political & regulatory risks, this report presents a risk-mitigation framework, listing 20 measures that can be taken by the public sector, by the private sector, and jointly by the various stakeholders (see Figure 1). 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 & regulatory risk. Further guidance is provided in the form of international best practices from the different infrastructure sectors surveyed in this report.