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It takes two to tackle political risk

There are a number of measures the public and private sector can take individually and jointly to mitigate regulatory and political risk, WEF says in its new report.

Of all the risks facing infrastructure investors, political and regulatory risk is one of the major obstacles standing between them and the estimated $4 trillion needed annually to modernise the world’s infrastructure. To mitigate this risk, the World Economic Forum (WEF), in collaboration with the Boston Consulting Group, has compiled a list of measures that the public and private sector can adopt – some individually, some jointly – in a report released on Wednesday.

The report, titled “Strategic infrastructure mitigation of political and regulatory risk in infrastructure projects,” calls on the public sector to create a stable regulatory environment through rules that are adaptive in a predictable way, a legal framework that is conducive to preserving established principles and non-partisan alignment of goals and strategy, among other measures.

“It helps to have automatic adaptation mechanisms in place – for example, linking photovoltaic energy feed-in tariffs to the development of module cost, or adapting the duration for a highway concession according to the actual revenue collected from road users,” WEF wrote in the report.

Other steps the public sector is encouraged to take include efficient procurement and permit processes, strict implementation of anti-corruption and transparency standards, and providing a range of dispute-resolution options.

The private sector also needs to develop tools to mitigate regulatory and political risk. “For ‘hard’ risks, such as expropriation or currency inconvertibility, companies can make use of financial instruments such as political risk insurance or guarantees, issued by multilateral organisations, national providers and the private market,” according to the report.

Another way to contain risk is through a “carefully-crafted ownership structure,” that would include international co-owners and co-financiers as well as joint ventures with local partners.

“Many of the solutions listed are of proven value,” executive chairman of Aecon (Canada) and a global co-chair of WEF’s Strategic Infrastructure Initiative, John Beck, said in a statement referring to the report. “Consider the strategy adopted by some private companies, of involving a public body as counterweight to the tendering government,” he said. “In the Quito Airport case, for instance, the involvement of the Canadian government helped us speedily resolve our differences with the Ecuadorian authorities,” he noted, referring to the dispute that arose in 2009 between the airport concessionaire and the Ecuadorian government when the country’s constitutional court ruled that private airport fees were state property.

Standardising infrastructure securities and making infrastructure a tradeable asset class would also help, not necessarily by mitigating risk but by making it easier to transfer risk, WEF claimed in the report. A tradeable asset class would also enable the development of benchmarks making it easier for long-term investors to better monitor their investments.

“Furthermore, investors could respond more easily to changes in the political and regulatory risk landscape and adjust their asset allocation, and could thus ‘discipline’ government behaviour by deterring adverse interventions in the first place,” WEF stated.

As for working together, the public and private sector need to manage risk perception and risk expectation and maintain a dialogue that goes beyond specific projects.

The report, whose findings were also presented at CG-LA’s 8th Global Infrastructure Leadership Forum held in New York on Tuesday and Wednesday, is part of WEF’s Strategic Infrastructure Knowledge Series.