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Mitigation of Political and Regulatory Risk in Infrastructure Projects

Strategic Infrastructure

February 25, 2015 By Philipp Gerbert , Armin  Lohr , Christoph Rothballer , and Bjarne Steffen

To encourage sustainable economic growth worldwide, a huge investment will have to be made in infrastructure projects (an estimated 5 percent of global GDP during the next 15 years), and a significant share of this investment will have to come from the private sector. Private investors are understandably cautious, however. In particular, they are concerned about political and regulatory risk, because an infrastructure asset typically has a lifetime much longer than political cycles, and investors’ revenues and cost base depend heavily on regulation.

Political and regulatory risk is not simply a matter of outright expropriation, which is a widely publicized danger yet is actually quite rare. It takes many other forms, too, and occurs at all phases of an infrastructure project’s life cycle. Early risks include delayed construction permits and community protests; risks during the operating phase include breach of contract and tightened regulations; and end-of-life risks include the nonrenewal of licenses and revised decommissioning requirements. In addition, some broader risks apply throughout the life cycle—changes to taxation laws, for instance, and endemic corruption.

Strategic Infrastructure: Mitigation of Political & Regulatory Risk in Infrastructure Projects, a new World Economic Forum report developed in collaboration with The Boston Consulting Group, is part of the Strategic Infrastructure Knowledge Series, which addresses key challenges to bridging the global infrastructure gap. (Previous reports covered public-private partnerships and operations and maintenance.)

Following a detailed analysis of the political and regulatory risk facing infrastructure investors and operators, the report’s authors developed a holistic risk-mitigation framework. It consists of 20 actionable measures to be taken by the various parties—some by the public sector, some by the private sector, and some by the two sectors jointly. It provides further guidance in the form of 25 international best practices from different infrastructure sectors—such as roads, railroads, airports, and electricity supply—where political and regulatory risk has been mitigated effectively.

The public sector, in particular national governments, has to create a stable environment for private investors and operators by ensuring that changes to sector rules are as predictable as possible—for instance, by using automatic adaptation mechanisms. Other public-sector measures include investor protection through constitutional guarantees or equitable international treaties, fair and fast dispute-resolution mechanisms, and strong anticorruption policies.

But it is not just governments that are responsible for mitigating political and regulatory risk; the private sector also has the means to manage, transfer, or reduce these risks. Investors and operators could seek political-risk insurance, for example, and companies could deter government intervention by carefully crafting ownership and commercial structures. Inclusive community engagement and overall responsible business conduct can further contribute to proactively reducing political and regulatory risk.

The report acknowledges that it will always be a challenge to get the balance right—between investors’ need for regulatory stability and government’s freedom to adjust regulation in line with national priorities. But if both sides come to see that their interests are, at a deeper level, actually aligned, then they should be able to compromise and cooperate, to the benefit of all stakeholders.

The original version of the report was published by the World Economic Forum.

Download the full report
Mitigation of Political and Regulatory Risk in Infrastructure Projects
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