The need for infrastructure investment around the globe is climbing. In emerging markets, population growth, increasing urbanization, and rising per capita incomes are driving the demand for new roads, power stations, schools, and water delivery systems.
In the developed world, including the United States, significant reinvestment in aging infrastructures is becoming more urgent. But this need for infrastructure investment comes in the wake of a financial crisis that has severely constrained public budgets in many countries. The result: a staggering gap of approximately $1 trillion to $1.5 trillion annually between demand and investment in infrastructure.
Public-private partnerships (PPPs) will increasingly play a crucial role in bridging the gap. These partnerships—in which the private sector builds, operates, and maintains infrastructure projects subject to strict government regulation and oversight—tap private sources of financing and expertise to deliver large infrastructure projects more efficiently and effectively.
The public sector needs to apply best practices to every stage in the planning and implementation of a PPP, including selecting the right projects, deciding whether a PPP will add value, designing the project that is bankable, developing a regulatory structure and contract that can weather the uncertainties across decades, managing a competitive and transparent transaction process, and engaging in rigorous implementation monitoring.
Meanwhile, the private sector needs to develop a sophisticated approach to managing the myriad risks that PPPs present, from the political challenges associated with a change in government policy to the risk of setbacks in financing or construction delays. Given the critical importance of risk management and financing, construction companies often have to excel in skills that are usually more closely associated with asset managers and banks.
Private companies also need to build a broad set of skills in-house. They may need to orchestrate a consortium that delivers everything from design to operations.
When managed effectively, PPPs not only provide much needed new sources of capital but also significant discipline to project selection, construction, and operation.