Industry Agenda

Strategic Infrastructure
Mitigation of Political
& Regulatory Risk in
Infrastructure Projects

Prepared in collaboration with The Boston Consulting Group

February 2015
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Contents

4 Foreword
8 Contributors
10 Executive Summary
12 1. Introduction and Landscape
of Risk
14 1.1 Landscape of political &
regulatory risk
19 1.2 Best-practice framework for
risk mitigation
20 2. Public-Sector Measures
20 2.1 Robust infrastructure
regulation and contracts
21 2.2 General stability of laws and
regulation
22 2.3 Reliable and efficient
administration
23 2.4 Reliable dispute-resolution
mechanisms
24 2.5 International commitments
28 3. Private-Sector Measures
28 3.1 Appropriate use of financial
instruments
32 3.2 Effective interaction with the
public sector
33 3.3 Inclusive community
engagement
34 3.4 Responsible business
conduct
36 4. Joint Public-Private Measures
38 5. The Way Forward
40 Abbreviations
41 Appendix: Landscape of Political &
Regulatory Risk
42 Endnotes
44 Bibliography

Mitigation of Political & Regulatory Risk in Infrastructure Projects 3

Foreword project lifecycle. The approach elicits four categories of risks:
business factors, political and regulatory risk, macroeconomic
and social environment, and force majeure.

Political and regulatory risk is a categorization that includes

Foreword from the World Economic Forum those risks arising from individual political and regulatory
decisions that affect an infrastructure project or an existing
Current demand for infrastructure is about $4 trillion in annual asset. In particular, the approach distinguishes political and
expenditure with a gap of at least $1 trillion every year. In spite regulatory risk affecting specific projects and those affecting
of the growing gap in building new infrastructure, it should be the whole economy. In this context, the three groups of risk-
emphasized that the worldwide stock of existing infrastructure mitigation measures covered in this report are: public sector
is worth about $50 trillion. This existing stock also offers a real measures, private sector measures, and joint public-private
opportunity to narrow the infrastructure gap if governments measures. For each of these groups, the report identifies and
are capable and willing to optimize their infrastructure assets illustrates specific best practices for risk mitigation, namely:
as a viable alternative to build new assets.
- Robust infrastructure regulation and contracts
One of the most important areas for alternative investment is - General stability of laws and regulations
indeed infrastructure, particularly if this type of asset offers the
necessary conditions to better balance long-term investment - Reliable and efficient administration
strategies. If building new infrastructure is the right solution, it - Reliable dispute-resolution mechanisms
is an imperative that projects are bankable and represent the
best value for money in terms of delivery model. Exceptional - International commitments
progress has been made, for instance, in disseminating - Appropriate use of financial instruments
best practices for delivery models such as public-private
partnerships, which constitute a convenient solution to tap - Effective interaction with public sector
into private sector capital or when there is a clear advantage - Inclusive community engagement
in transferring risk to a party that is most capable of managing
- Responsible business conduct
it. A dedicated infrastructure asset class would also attract
investors when assessing their long-term portfolio strategies, - Culture of open dialogue
which are in good alignment with the lifetime of such
operating assets. The Strategic Infrastructure Initiative – and its Knowledge
Series Reports – has been providing a roadmap to steer
Although the specific challenges that economies face are governments and key stakeholders to comprehensive
different and require targeted solutions, there is a lack frameworks and actionable best practices that cover the
of instruments to mitigate the risk often associated with whole infrastructure life cycle, namely origination, preparation
financing and investing in infrastructure. This challenge and implementation of physical assets. This report is an
has been identified already by the High-Level Panel on extension of the Knowledge Series as it was felt that the
Infrastructure during the B20 and G20 in Cannes in 2011, World Economic Forum needed to specifically address the
but has been sparsely addressed in subsequent discussions political and regulatory barriers to infrastructure financing and
including the more recent ones held in Russia in 2013 and investment. This work is already positioned under the broader
Australia in 2014. However, the focus of these discussions umbrella of the Global Challenge Initiative on Infrastructure,
only partly elicited the lack of instruments that multilateral Long-term Investing and Development, which will continue
development banks would needed to put in place, whereas to carve out an exceptional space for a number of regional
a significant part of the effort should also rely in the private and national discussions in the years to come, including Latin
sector’s hands. America and Asia and also Europe and North America. These
efforts will continue to substantiate the globally acquired body
The private sector has the means to create new risk of knowledge and experience into concrete measures that
mitigation instruments that are still missing and, equally contribute to boosting strategic infrastructure development,
important, set the stage for an enabling environment that may including its dissemination through the B20 and G20.
lead an infrastructure asset class. Examples of missing risk
mitigation instruments include – but are not restricted to – This report is a direct result of a cooperative process with
asset specific risk, concession renewal risk, taxation risk and, leaders from government, civil society and the private sector,
very importantly, corruption and market distortion risk. The particularly the engineering and construction, financial
World Economic Forum’s Strategic Infrastructure Initiative is a services and investors industries. In this regard, we would
collaborative reflection of the steps required to efficiently and like to thank and acknowledge the World Economic Forum
effectively deliver economic infrastructure projects. Partner companies that served on the Strategic Infrastructure
Initiative Steering Committee: ABB, Aecon, Alcoa, Amec
The landscape of risk for infrastructure projects presented Foster Wheeler, APM Terminals (A.P. Møller-Maersk), Arup,
in this report consists of a multidimensional view on risk Bilfinger, CCC, CH2M HILL, Danfoss, Fluor Corporation, GE,
factors and their relevance to specific phases during the Hindustan Construction Company, Kokusai Kogyo (Japan

4 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Asia Group), McGraw Hill Financial, Prudential, Punj Lloyd,
Siemens, Skanska, SNC-Lavalin Group, Standard Chartered,
Swiss Re, The Abraaj Group, The Rockefeller Foundation,
Toshiba, Welspun Corporation and WS Atkins.

We would like to give special acknowledgement to Gordon

Brown (Prime Minister of the United Kingdom 2007-2010).
Uwe Krüger (Chief Executive Officer, WS Atkins). Michel
M. Liès (Group Chief Executive, Swiss Re). Arif M. Naqvi
(Founder and Group Chief Executive, The Abraaj Group),
Doug Peterson (President and Chief Executive Officer,
McGraw Hill Financial), Danny Truell (Chief Investment Officer,
Wellcome Trust), Kim Fejfer (Chief Executive Officer, APM
Terminals, A.P. Møller-Maersk) and John Beck (Chairman,
Aecon) for their relentless interest and commitment to serve
as Global Co-Chairs of the Strategic Infrastructure Initiative
since the spring of 2014.

We would also like to thank the many experts who

contributed to the report through their role on the Strategic
Infrastructure Initiative Advisory Committee: Norman
Anderson (CG/LA Infrastructure), Victor Chen Chuan
(University of Sichuan), Karim Dahou (OECD), Nathalie
Delapalme (Mo Ibrahim Foundation), Angelo Dell’Atti (IFC),
Timothy Geer (WWF), Al Hamdani (Export Development
Canada), Geoffrey Hamilton (UNECE), Clive Harris (World
Bank Institute), Franziska Hasselmann (University of St.
Gallen), Debbie Larson-Salvatore (US Army Corps of
Engineers), Clare Lockhart (Institute for State Effectiveness),
Kevin Lu (INSEAD), Thomas Maier (EBRD), Mthuli Ncube
(African Development Bank), Aris Pantelias (University
College London), Mark Romoff (Canadian Council for Public-
Private Partnerships), Douglas Stollery (Stollery Charitable
Foundation), Jan Van Schoonhoven (UNECE), Ramesh
Subramanian (Asian Development Bank) and James X.
Zhan (UNCTAD). Melanie Schultz van Haegen, Minister of
Infrastructure and the Environment of the Netherlands, is
kindly acknowledged for contributing best-practice examples
from her ministry.

Finally, we would like to thank the cross-fertilization brought

about by the Members of the Global Agenda Council on
Infrastructure and its chair and vice-chair, Thomas Maier
(EBRD) and Rashad R. Kaldany (Caisse de dépôt et
placement du Québec, Canada). The experience, perspective
and guidance of all the above people and organizations
contributed substantially to a number of remarkable
discussions with highlights at the World Economic Forum
Annual Meeting 2015 in Davos-Klosters, Switzerland on 21-
24 January.

Pedro Rodrigues de Almeida

Director
Head of Infrastructure & Urban Development Industries
World Economic Forum

Alex Wong
Senior Director
Head of Centre for Global Industries
World Economic Forum

Mitigation of Political & Regulatory Risk in Infrastructure Projects 5

Foreword from the World Bank Group together many of the key components. Whether it is robust
regulation and contracts, stability of law or reliable dispute
Trillions of dollars are needed to bridge the infrastructure gap, resolution mechanisms for the public sector and effective
$4 trillion per year until 2030 according to this report. The and constructive interaction with the public sector, inclusive
enormity of the numbers discussed must not and cannot community engagement or responsible business conduct for
inhibit tackling the task at hand. The possibility and the the private sector, the report highlights a pragmatic overview
consequences of failure will have a multi-generational impact. of possible ways forward. By managing perceived and actual
However, dismantling the single dollar requirement into its risks as well as the impact these have on return expectations,
components is critical in order to make progress. This report a cohesive way forward can be found.
provides a valuable contribution to the continuing analysis and
progress of this issue by setting out the areas of certain risks As someone who has been in the midst of many discussions
and the potential mitigants. It unboxes the various elements concerning infrastructure investment, the market failure, the
of political and regulatory risk in infrastructure projects and large financing gap and the unbundling of the problem of
identifies factors which need to be harnessed in order for mobilizing private sector investment in partnership with public
investment to flow more efficiently and in greater volume. sector capital, I know how critical solving this conundrum is.
Indeed, it is our duty and responsibility to resolve it.
It can be an easy argument for certain market participants
to push readily the responsibility of solving the problem on I am grateful to this report as it contributes to marshalling our
to either the private sector or the public sector. Of course, energies and provides a solid basis from which to continue to
the reality is far from being so easy or simple; it cannot be progress the assessment and, crucially, the implementation of
just one or the other. Genuine, transparent partnerships are the necessary steps.
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 Bertrand Badré
Managing Director and World Bank Group Chief Financial Officer,
ensure that robust, transparent and reliable processes and World Bank, Washington DC
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

6 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Foreword from the Minister of Infrastructure and the We also recognize the close link between climate and
Environment, The Netherlands infrastructure, and thus both fields are incorporated in one
Dutch government department – the Ministry of Infrastructure
Infrastructure is currently at the heart of many critical issues and the Environment. Moreover, investment in long-term
facing our economies. Infrastructure is not just about a new assets such as infrastructure is subject to political and
bridge here or a toll road there. It is about enabling the health regulatory risk. Worldwide investors need to trust the
of our cities, national competitiveness and the future of our consistency of political administrations’ support for projects,
planet. The recent financial crises showed that a reduction in both now and in the future. Hence, it is critically important to
infrastructure spending has a serious impact on economies all mitigate political and regulatory risk as much as possible.
over the world.
This report contributes greatly to address this topic by
On average, infrastructure development in developed structuring and summarizing possible measures in risk
countries is around 5% of national GPD. For developing mitigation. My ministry was glad to contribute our best-
countries, infrastructure is essential also in social practice examples and we look forward to learn from the
development to provide electricity, water and food, and experiences of others. The multistakeholder approach of the
to contribute to human well-being. On a global scale, World Economic Forum is indeed the right approach. It allows
infrastructure investments are needed to mitigate the effects everyone to reach a well-balanced view and to develop a
of climate change: A low-carbon investment agenda in power number of steps which might be taken by both the public and
generation, transport development and cities is needed the private sector, or jointly.
to sustainably reduce CO2 emissions. Furthermore, the
resilience of infrastructure is of increasing importance as our The report merits reaching a wide audience and will provoke
planet faces more extreme weather patterns. strong discussion and solutions that will help mitigate political
and regulatory risk, and will allow for the improvement of our
The amount of investment needed for all these infrastructural world by the realization of important infrastructural projects.
demands is enormous, and it will require strong private
sector involvement and investment. The Netherlands has a I would like thank everybody involved for their valuable
long-standing and successful experience with private sector contributions to this report.
participation through public-private partnerships. These
partnerships are used in such diverse sectors as roads, water Melanie Schultz van Haegen
or hospitals. This includes open and transparent processes Minister of Infrastructure and Environment of the Netherlands
and early stage involvement of the private sector in its project
pipeline.

Mitigation of Political & Regulatory Risk in Infrastructure Projects 7

Contributors

Project Team A.P. Møller-Maersk

Bjarne Steffen - Karel Drastich, Director Business Development
Project Manager, Global Strategic Infrastructure Initiative - Chief Executive Officer, APM Terminals: Kim Fejfer
Vangelis Papakonstantinou Arup
Senior Manager, Global Strategic Infrastructure Initiative - Peter Chamley, Director, Chair, Global Infrastructure Practice
- Chairman: Gregory Hodkinson
Editors Bilfinger
World Economic Forum - Jörg Weidner, Senior Manager, Technology Centre
Alex Wong - Chairman of the Executive Board: Herbert Bodner
Senior Director, Head of the Centre for Global Industries CH2M HILL
Pedro Rodrigues de Almeida - Sharon A. Jean-Baptiste, Rotational Assistant to the Chief
Director, Head of Infrastructure & Urban Development Executive Officer
Industries - Chief Executive Officer: Jacqueline Hinman
Fernando J. Gómez Consolidated Contractors Company
Director, Latin America - Chafic Ladkani, Senior Financial Analyst, Treasury
- President, Engineering & Construction: Samer S. Khoury
The Boston Consulting Group (Adviser & Knowledge Danfoss
Partner) - Fleming Voetmann, Head, Public Affairs and Leadership
Philipp Gerbert Communication
Senior Partner and Managing Director, Global Head of - President and Chief Executive Officer: Niels Christiansen
Infrastructure Fluor
Armin Lohr - Robert Prieto, Senior Vice-President
Partner and Managing Director, Head of Infrastructure Middle - Chairman and Chief Executive Officer: David T. Seaton
East
GE
Christoph Rothballer
- Jay Ireland, Chief Executive Officer, GE Africa
Project Leader, Infrastructure Expert
- Nils Tcheyan, Head, Africa Policy
- Chairman and Chief Executive Officer: Jeffrey R. Immelt
Steering Committee of the Strategic Infrastructure
Knowledge Series Hindustan Construction Company
ABB - Arjun Dhawan, President, Infrastructure Business
- Chief Executive Officer: Ulrich Spiesshofer - Chairman and Managing Director: Ajit Gulabchand
Aecon Kokusai Kogyo (Japan Asia Group)
- Steve Nackan, President Aecon Concessions - Kiyoaki Sugiyama, Executive Officer
- Chairman and Chief Executive Officer: John M. Beck - Chairperson and Chief Executive Officer: Sandra Wu
Alcoa McGraw Hill Financial
- Kevin McKnight, Chief Sustainability Officer and Vice- - Ted Smyth, Executive Vice-President, Corporate Affairs
President, Environment, Health and Safety - President and Chief Executive Officer: Douglas L. Peterson
- Chairman and Chief Executive Officer: Klaus Kleinfeld Prudential
Amec Foster Wheeler - Matthew Farnum-Schneider, Director, Business
- Duncan Guy, Senior Vice-President and Head of Development and Strategy
Government Relations - Group Chief Executive: Tidjane Thiam
- Chief Executive Officer: Samir Brikho
8 Mitigation of Political & Regulatory Risk in Infrastructure Projects
Punj Lloyd Advisory Committee of the Strategic Infrastructure
- Luv Chhabra, Director, Corporate Affairs Knowledge Series

- Chairman: Atul Punj Norman Anderson, President and Chief Executive Officer,
CG/LA Infrastructure
The Rockefeller Foundation
Victor Chen Chuan, Professor of Engineering Management,
- Michael Berkowitz, Managing Director Business School, Sichuan University
- President: Judith Rodin Karim Dahou, Executive Manager, Development Unit,
Siemens Directorate for Financial and Enterprise Affairs, Organisation
for Economic Co-operation and Development
- Roland Busch, Member of the Managing Board
Nathalie Delapalme, Director, Research and Policy, Mo
- Chief Executive Officer: Joe Kaeser
Ibrahim Foundation
Skanska
Angelo Dell’Atti, Manager, International Finance Corporation
- Nick Doherty, Executive Vice-President
Timothy Geer, Director, Public Sector Partnerships, WWF
- President and Chief Executive Officer: Johan Karlström International
SNC-Lavalin Al Hamdani, Vice-President and Head, Risk Management,
- Christian Jacqui, Executive Vice-President, Global Export Development Canada
Operations Geoffrey Hamilton, Senior Economic Affairs Officer, United
- President and Chief Executive Officer: Robert G. Card Nations Economic Commission for Europe
Standard Chartered Clive Harris, Practice Manager, Public-Private Partnerships,
World Bank Institute
- Ravi Suri, Head, Project and Export Finance in India, Africa
and MENA Franziska Hasselmann, Director of Studies CAS MIA, Institute
of Accounting, Control and Auditing, University of St Gallen
- Group Chief Executive: Peter Sands
Debbie Larson-Salvatore, Institute for Water Resources, U.S.
Swiss Re
Army Corps of Engineers
- Jerome Haegeli, Head, Investment Strategy, Managing
Clare Lockhart, Director and Co-Founder, Institute for State
Director, Group Asset Management
Effectiveness
- Group Chief Executive Officer: Michel M. Liès
Kevin Lu, Distinguished Fellow, INSEAD
The Abraaj Group
Thomas Maier, Managing Director, Infrastructure, European
- Tabish Gauhar, Partner Bank for Reconstruction and Development
- Founder and Group Chief Executive: Arif M. Naqvi Mthuli Ncube, Chief Economist and Vice-President (2010 -
Toshiba 2014), African Development Bank
- Shoji Takenaka, Global Vice-President, Smart Community Aris Pantelias, Lecturer and Course Director, MSc
Division Infrastructure Investment and Finance, The Bartlett School
of Construction & Project Management, University College
- President and Chief Executive Officer: Hisao Tanaka
London
Welspun
Mark Romoff, President and Chief Executive Officer, The
- Vineet Mittal, Managing Director, Welspun Energy Canadian Council for Public-Private Partnerships
- Raghunath Mahapatra, Head, Strategy Douglas Stollery, Stollery Charitable Foundation
- Chairman: Balkrishan Goenka Jan van Schoonhoven, Counsellor Infrastructure and PPP,
WS Atkins United Nations Economic Commission for Europe
- Jeff Herriman, Group Director, Corporate Development Ramesh Subramaniam, Deputy Director-General, Southeast
Asia Department
- Chief Executive Officer: Uwe Krüger
James X. Zhan, Director, Investment and Enterprise, United
Nations Conference on Trade and Development

Mitigation of Political & Regulatory Risk in Infrastructure Projects 9

Executive Summary

One prerequisite for sustainable and inclusive growth construction permits, and community opposition; during
worldwide is a modern and efficient infrastructure. The the operating phase – changes to various asset-specific
required investment for reaching the optimal level is regulations, and outright expropriation; towards the end
enormous, estimated at 5% of global gross domestic product of a contract – the non-renewal of licences, and tightened
(GDP) (or $4 trillion) per year until 2030 – an amount that decommissioning requirements. In addition, some broader
the public sector would find almost impossible to raise on risks apply throughout the life cycle, and can affect an entire
its own. The gap will have to be filled by the private sector, infrastructure sector (or even the entire national economy) –
but private investors are cautious when it comes to large changes to sector regulation or taxation laws, for instance,
and long-term infrastructure investments. In particular, they and endemic corruption.
are concerned about political & regulatory risk, because an
infrastructure asset typically has a lifetime much longer than To address all these political & regulatory risks, this report
political cycles, and the investors’ revenues and cost base presents a risk-mitigation framework, listing 20 measures
depend heavily on regulation. 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
Political & regulatory risk has many facets holistic view of the potential levers, and hence to undertake
a comprehensive effort to mitigate political & regulatory risk.
During the different stages of a project’s life cycle, Further guidance is provided in the form of international best
infrastructure projects are exposed to very different types of practices from the different infrastructure sectors surveyed in
political & regulatory risk. Among the risks are, for example: this report.
during the planning and construction phase – delayed

Figure 1: Risk-Mitigation Framework

x.x Report section

Joint public-private measures
4.
Culture of Management of risk perception Multi-stakeholder dialogue
open dialogue and return expectation beyond specific projects

Private-sector measures
3.1 3.2 3.3 3.4
Appropriate use of Effective interaction Inclusive Responsible
financial instruments with public sector community engagement business conduct

Risk guarantees and Constructive communication Participatory planning and Prevention and prosecution of
political-risk insurances with public agencies low-burden construction illegal or unethical behaviour

Tradeable instruments and Monitoring of political develop- Ongoing community Professional and sustainable
ownership structure ments, and advocacy strategy involvement during operation operations

Public-sector measures
2.1
Rules that are adaptive in a “Stress-tested” regulation that will
Robust infrastructure regulation and contracts predictable way function under unfavourable conditions

2.2
Legal architecture conducive to preserving Non-partisan alignment on infrastructure
General stability of laws and regulation established principles vision and strategic decisions

2.3
Clear agency set-up, and efficient Strict implementation of anti-corruption and
Reliable and efficient administration procurement and permit processes transparency standards

2.4
Reliable dispute-resolution mechanisms Range of dispute-resolution options Effective judicial capacity

2.5
Transnational programme management for
International commitments International investment agreements
cross-border infrastructure projects

Source: World Economic Forum; Boston Consulting Group

10 Mitigation of Political & Regulatory Risk in Infrastructure Projects

The public sector has to create a stable Private companies should also put particular effort into
regulatory environment effective communication, both with public agencies and with
affected communities. That will help manage the “soft” risks,
The public sector, in particular the national government, by preventing misunderstandings and building a culture of
can enhance political & regulatory stability by enacting and trust. And when it comes to operating the asset, the more
enforcing appropriate laws and regulation. The specific companies maintain professional and sustainable operations,
regulation of each infrastructure sector should be robust, the less likely they are to induce political or regulatory
with changes to sector rules that are as predictable as interference.
possible. In that regard, it helps to have automatic adaptation
mechanisms in place – for example, linking photovoltaic
energy feed-in tariffs to the development of module cost, or Comprehensive multi-stakeholder action is
adapting the duration for a highway concession according to needed
the actual revenue collected from road users. Beyond specific
sector regulation, the overall legal architecture must also be There is no silver bullet for addressing the many facets
considered: it should be conducive to a stable regulatory of political & regulatory risk. The risk-mitigating measures
environment, by providing constitutional guarantees or presented in this report all have their uses, and they
dedicated investment stability laws. complement one another. Public and private stakeholders
should cooperate, to prioritize areas for action and to create a
Legislation alone is not enough, however. The laws and culture of open dialogue.
regulation need to be stringently implemented, by the It will always be a challenge to get the balance right –
country’s executive branch. To mitigate the risk of unexpected between the investors’ need for regulatory stability and
and adverse administrative decisions, governments need to governments’ freedom to adjust regulation in line with national
ensure a reliable agency set-up, with efficient procurement priorities. But reasonable stability must be achieved to boost
and permit processes that never compromise on their private investment, to increase the quality and quantity of
integrity, as well as strong anti-corruption measures. Investors infrastructure projects, and hence to benefit society at large.
and the government also need to have confidence in the
available dispute-resolution mechanisms, so countries must
ensure a judicial capacity that administers the law in an
independent, timely and efficient way.

Further protection for investors can be provided by

international commitments – hence the ongoing effort
to (re-)negotiate bilateral investment treaties (BITs) and
investment protection clauses in free trade agreements.
Although BITs have been in place for a long time, some
countries are still making very little use of them. And many
BITs have shortcomings, such as vague protection clauses
and controversial arbitration procedures, that cause concern
to policy-makers and the public. Those issues are being
addressed, however, by emerging new standards and by
innovative clauses. So countries might consider increasing
their involvement in equitable international commitments as
a way of mitigating political & regulatory risk and fostering
private investment in infrastructure projects.

The private sector also has means to manage

and mitigate political & regulatory risk
Within the framework set by the public sector, the private
sector has to find ways of managing and mitigating
the political & regulatory 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 organizations,
national providers and the private market. In addition,
political & regulatory risk could be mitigated by a carefully-
crafted ownership structure: international co-owners and
co-financiers – such as multilateral development banks or
institutions from an investor’s home country – can have a
“deterrence” effect on political intervention, and joint ventures
with local partners can enable an infrastructure operator to be
viewed as more than just a “foreign investor”.

Mitigation of Political & Regulatory Risk in Infrastructure Projects 11

1. Introduction and Landscape of Risk

For inclusive and sustainable growth, one of the crucial The infrastructure gap and private investment
requirements is modern and efficient infrastructure. In many
emerging markets, the infrastructure remains inadequate Overall, the investment required globally for infrastructure
in quality and quantity – a situation that severely limits the projects is at least $4 trillion (or 5% of global GDP) per year
countries’ potential to develop and increase their population’s until 2030.5 Given fiscal constraints, the public sector can raise
well-being.1 Many advanced economies are facing barely half of that amount.6 Private investment is essential
infrastructure issues now as well. In the wake of the global for bringing in the required resources and is expected to
financial crisis, they have been suffering from low growth, and fill the gap: one well-established delivery mode for private-
the quality of their existing infrastructure is deteriorating. So sector participation in some countries is that of public-private
they too would benefit from further infrastructure investment. partnerships (PPPs) and related arrangements.7 Given their
According to a 2014 IMF estimate, if advanced economies relatively stable long-term cash flows and low correlation to
invested an extra 1% of GDP into infrastructure, they would other asset classes, infrastructure investments could also be
achieve a 1.5% increase in GDP four years later.2 very attractive to the private sector – especially to institutional
investors, such as pension funds, insurance companies and
Improved infrastructure will also be a crucial factor in achieving sovereign wealth funds.
sustainable development goals. In fact, the 2015+ sustainable
development goals proposed by the United Nations imply a However, supply and demand do not always fit well together,
massive investment need into infrastructure assets. These
3 in part because the risk−return profile of projects does not
new assets should be resilient to the impact of climate change really match the expectations of potential investors. As Figure
8

and, at the same time, meet new environmental standards: 2 shows, market risk premiums differ substantially between
the increase in traffic on new highways, for instance, will countries and are especially high in regions that have a high
ideally be offset by an even greater increase in efficiency, to infrastructure investment need – notably, Africa, Latin America,
reduce overall carbon emissions. 4 South and South-East Asia, and South-East Europe.

Of course, the private sector is not generally averse to risk and

will venture to make risky investments provided that the risks
are manageable – and provided that the expected returns are
in proportion to the level of risk. High risk premiums translate
into high return expectations, and if those expectations appear
unrealizable, the result will be that the proposed projects fail to
attract any private investment whatsoever.

Figure 2: Required Market Risk Premium 2014 (Survey Data)

East & Southeast

Europe

South &
Southeast
Latin Asia
America
Africa

< 6% > 12% No data

Source: Fernandez et al. (2014); BCG analysis

Note: Market Risk Premium = difference between the expected return in a market and the risk-free rate.
Survey conducted among finance and economics professors, analysts and managers of companies

12 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Political & regulatory risk as an impediment to Figure 3: Political Risk vs Other Constraints on Investment
additional private investment
Major constraints on foreign investments in emerging markets over the next three
years (% of respondents)
Investment risk is attributable to many factors – construction
25%
challenges, demand uncertainty and macroeconomic
conditions, for example. One of the highest-ranked factors, Macroeconomic instability  
however, is political & regulatory risk, which represents a 20%
Political risk  
major constraint on investment decisions. Approximately Access to qualified staff  
20% of executives regard political risk as the greatest Access to financing  
15%
disincentive for any investments into emerging markets,
more important than any other constraint except for
macroeconomic instability (see Figure 3). It is the main reason 10% Corruption  
why some investors, even when urgently seeking investment Infrastructure capacity  
opportunities, will simply not consider infrastructure assets in Limited market opportunities  
emerging and developing countries. 5%
Increased government
intervention in the aftermath
of the global financial crisis
Of course, a well-designed system of regulation is
advantageous for society, and infrastructure investors have 2011 2012 2013
no problem with regulation per se. Rather, their concern is
Source: MIGA-EIU annual political risk surveys; BCG analysis
that laws and regulation can change unexpectedly; that is Note: Global survey; ranking might differ between regions
how political & regulatory risk arises, and the risk applies
particularly strongly to infrastructure investments. Such
investments typically involve a very long asset lifetime and Figure 4: Investor-vs-State Arbitration Cases by Respondent
contractual relationship, and payback well beyond the term Country
of any individual government. Given this mismatch between
Number of investor-vs-
political cycles and the infrastructure cycle, infrastructure state arbitration cases
investors are understandably cautious: they want to be 39
40
fairly sure not only that the current government meets
23% 30%
its commitments but also that the decisions of a future (12)
(9)
parliament or administration will not affect their investment too
severely. Developed 27 15%
economies 7% (2) (6) 18%
Originally, political risk was primarily caused by uncertainty Transition 19% (7)
economies (5)
about overall political stability, so its relevance was limited
mainly to developing economies and young states. However,
political risk is now affecting the developed world as well, 62%
owing to various political or regulatory decisions taken by Developing 74% (24) 53%
economies (20) (21)
several industrialized countries – for example, the special
taxes introduced in some countries because fiscal stability
had been weakened, in the wake of the recent financial crisis.
Witness the current profile of international arbitration: in about
2010 2012 2014
30% of the cases following the rules of the International
Centre for the Settlement of Investment Disputes (ICSID), Source: ICSID Annual reports; BCG analysis
investors cite a developed country as respondent (see Figure Note: Newly registered cases based on ICSID rules (in ICSID financial years, July–
June); numbers might not add up to 100% due to rounding
4).9 The cases now cover such diverse topics as sector tax
changes and changes to renewable energy feed-in tariffs.
Report scope and structure
In addition, regulation plays an especially important role
in many infrastructure sectors. In some cases, the market
This report discusses various ways of mitigating political
involves a natural monopoly: assets such as power grids,
& regulatory risk in infrastructure projects. The analysis
for example, clearly require attentive regulating to prevent
proceeds in two stages:
abuse of pricing power.10 In other cases, such as public
transportation, the assets may not be fully user-funded but – A risk landscape (presented in section 1.1) that clarifies
would rely partly on subsidies, so the magnitude of investor the different facets of political & regulatory risk along an
returns depends directly on money from the public purse, infrastructure project’s life cycle
and regulation therefore becomes a highly political and – A framework of risk-mitigation measures (introduced
controversial topic. in section 1.2) that includes steps by the public sector
(chapter 2), the private sector (chapter 3), and by multiple
stakeholders jointly (chapter 4); it describes how to
implement the recommended risk-mitigation measures
(chapter 5) and presents examples of international best
practices (marked as EXAMPLE each time).

Mitigation of Political & Regulatory Risk in Infrastructure Projects 13

Two notes on the focus of the report: first the emphasis
is on economic infrastructure, i.e. transport, energy,
1.1 Landscape of political &
telecommunication and water/wastewater. However,
many of the risks and mitigation measures apply to social
regulatory risk
infrastructure as well – to schools and hospitals, for example.
(In fact, much of the discussion is relevant to other large
For the purpose of this report, risk is to be understood as
investments too, such as steel or cement plants.); second,
“unpredictable variation of project or asset value to a private
the focus is on the risk faced by private-sector parties when
party” – the private party being an investor, developer or
dealing with governments or public agencies – and that kind
operator. The discussion focuses on adverse risk.12
of risk occurs mainly in projects involving PPPs or privatized
assets.
In infrastructure projects, private actors are subject to a wide
variety of risks. These risks, as shown in Figure 5 (and in a
BOX 1: The Strategic Infrastructure Knowledge Series
magnified version in the appendix), can be differentiated in
two ways: by the phase of the infrastructure life cycle in which
This report forms part of the World Economic Forum’s
they occur, and by the specific risk factor that causes the
Strategic Infrastructure Knowledge Series. While previous
uncertainty. In PPP contracts, for instance, the different risks
reports addressed infrastructure challenges along the life
are allocated to a private party, or to the public, or they are
cycle (from project prioritization to preparation to operations &
shared between the private and the public parties – ideally,
maintenance), this report complements the series by covering
each risk should be allocated to the party that is best able to
the cross-life-cycle topic of political & regulatory risk. The
manage the risk.13
reports in this series are:
Political & regulatory risk refers to those risks that arise
I. Steps to Prioritize and Deliver Infrastructure Effectively and
when individual political or regulatory decisions affect an
Efficiently (October 2012)
infrastructure project or asset.14 Such risks are hard for private
companies to manage (and often cannot be allocated to the
II. Steps to Prepare and Accelerate Public-Private
public sector), so the question is about mitigating them as far
Partnerships (May 2013)
as possible. Fourteen risks of this type are differentiated in this
report; some are project-specific, while others impact on the
III. Steps to Operate and Maintain Infrastructure Effectively
entire infrastructure sector. A differentiated understanding of
and Efficiently (April 2014)
political & regulatory risk is a prerequisite for its mitigation, so
a brief description of each type of risk is provided.
IV. Mitigation of Political & Regulatory Risk in Infrastructure
Projects (February 2015)
Risks affecting specific projects
This report also draws on the Infrastructure Investment Policy
Blueprint that was published by the World Economic Forum
The first group of risks consists of those that affect a specific
in February 2014. It derived actions for policy-makers based
project, such as a toll road, airport or power plant. The risk
on interviews with infrastructure investors, identifying policy
profiles of infrastructure assets differ greatly from one phase
and regulatory enablers as an important area.11
to another, as very different items of regulation and quite
different public-sector agencies may be involved. Accordingly,
it is worth differentiating between life-cycle phases:
Audience of the report specifically, between the planning/design/construction
phases, the operation phase and the termination phase.15
This report is intended primarily for senior government leaders
and for officials in national and international bodies who
– The planning/design/construction phases include
influence the political environment of infrastructure projects.
all activities prior to the commissioning of an asset,
It will help them assess the political-risk situation and will
i.e. planning and permits, design, procurement and
support their efforts to improve the investment environment.
construction.
As for specific policy recommendations, these will typically
depend on the country-specific context – to help identify the – The operation phase includes operation and maintenance
relevant recommendations for any given country, the report of the asset.
provides a framework to assess possible levers, and alerts
– The termination phase includes decommissioning or other
the reader to global best-practice examples that address
end-of-contract activities, such as contract extension or
political & regulatory risk.
asset transfer.
This report should also be helpful to private infrastructure
investors, developers and operators, as it outlines what Specific examples of each risk type are presented in Figure 6.
private companies can do to mitigate any political & regulatory
risk they are exposed to.

Finally, this report will be of interest to academics, the donor

community and members of civil society engaged in or
concerned about infrastructure development.

14 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Figure 5: Risk Landscape for Infrastructure Projects

Planning/Design/Construction phases Operation phase Termination phase

Risk factor

Site risk, e.g. difficult geological conditions Commercial risk, e.g. false demand estimate End-value risk, e.g. under-maintained asset
Business factors
Physical conditions/ Design risk, e.g. inadequate planning Operating-cost risk, e.g. wage increase
Demand side/
Business partners/ Construction risk, e.g. cost overrun Performance risk, e.g. unavailability
Own performance
Financing risk, e.g. failure to place bond Re-financing risk, e.g. floating interest rates
Focus of report
1 Cancellation & change of scope risk 4 Expropriation risk 7 Concession duration/renewal risk
e.g. rejection of PPP contract by parliament e.g. nationalization e.g. early termination
Affecting 2 5 Breach of contract risk 8 Asset transfer risk
specific Environmental & other permit risk 5
e.g. delay of construction permits e.g. denial of payment e.g. dispute over asset quality
project
3 Community risk 6 6 Asset-specific regulation risk 9 Decommissioning risk
e.g. non-approval by native populations e.g. operating time restrictions for airports e.g. tightened disposal requirements

Political &
10 Change of industry regulation risk, e.g. feed-in tariff cut, change of emission laws, change of labour laws, foreign-ownership restrictions
regulatory
decisions 11 Taxation risk, e.g. introduction of special taxes, increase in corporate tax rate
Affecting
sector or 12 Currency transfer & convertibility risk, e.g. interdiction of profit repatriation
entire
economy
13 Judicial risk, e.g. lack of predictability and timeliness of court decisions, uncertain enforceability of legal titles

14 Corruption risk/Market-distortion risk, e.g. demand of side-payments by agencies; opaque procurement processes

Macro- & socio- Risk of change to macro-economic fundamentals, e.g. economic crisis, exchange rate volatility, interest rate volatility, inflation
economic
environment Risk of change to socio-economic fundamentals, e.g. ageing society, xenophobia

Risk of man-made events, e.g. war, terrorism, civil disturbance, labour strike/industrial action
Force majeure
Risk of natural disasters, e.g. earthquake, flooding, hurricane, landslide

Source: World Economic Forum; Boston Consulting Group

Risks during the planning/design/construction phases Risks during the operation phase

1. Risk of cancellation or change of scope. A project is 4. Risk of expropriation. One fundamental political risk faced
vulnerable to cancellation if a new government sets by private infrastructure owners is the risk of outright
different priorities from those set by the previous confiscation or nationalization of their asset. More subtly, a
government, or if parliamentary approval is needed before series of renegotiations or regulatory changes can result in
major PPP contracts may proceed. Such a cancellation de facto expropriation, or “creeping expropriation”.
could hurt private companies, as they might already have
made significant investments in the project to prepare 5. Risk of breach of contract. In a PPP concession
their proposal. In addition, a decision on the part of arrangement, the government might breach its contractual
public authorities to change the project scope at a late obligations on the grounds of safety, health or other public
stage could have costly consequences for the private concerns. Whether these concerns are justified or not, the
participants delivering the project. value of the asset would be adversely affected.

2. Risk concerning environmental and other permits. 6. Risk of asset-specific regulation. For assets that could
Construction permit delays can have a severe impact seriously impact on communities or on the natural
on a project’s profitability, as cash flows start later than environment – assets such as airports or dams – the
anticipated. Such delays are often due to the unexpected operating regulations are obviously very specific. Any
outcomes of environmental and social-impact studies. small change to the details – to permissible noise levels,
Even permits issued promptly can contain unforeseen and for example, or water-quality requirements – can have a
costly conditions, such as compensation requirements or hugely detrimental effect on revenues or cost. The same
usage restrictions.16 is true for price caps, which might retroactively reduce toll-
road charges, for instance, and thereby lower expected
3. Risk of community opposition. Local communities can revenues.
affect projects in ways that do not just influence permit
procedures. Native populations, for example, can have Risks during the termination phase
formal or informal veto rights over such projects within
their territories; action groups can organize protests that 7. Risk concerning the duration or renewal of the concession.
prompt politicians to withdraw permission, and so on. When the expiry of a concession is near, uncertainty
Community risk is especially high if the project involves can be high: will the concession be extended or will it
land expropriations or relocation of local inhabitants. be put out for renewed tender? The risk also exists that
concessions will be terminated early.

Mitigation of Political & Regulatory Risk in Infrastructure Projects 15

8. Risk relating to the transfer of the asset. Some 9. Risk related to the decommissioning of the asset. If
concessions explicitly include the requirement or an asset has to be dismantled and disposed of at the
an option to transfer the asset to the state or to a end of its lifetime, the related cost will depend heavily
new concessionaire. In such cases, there is a risk of on the environmental standards imposed, for example
disputes over the transfer price, for instance based on for the recultivation of open pits or the restoration of
disagreements on how to measure asset quality or on contaminated sites. If the standards are tightened during
which valuation rules to apply. the operation phase, the predicted decommissioning
costs will increase, and provision will have to be made for
that increase well before the actual decommissioning.

Figure 6: Examples of Political & Regulatory Risks

Planning/Design/
Construction phases Operation phase Termination phase

1 Cancellation/Change of 4 Expropriation risk: Railway 7 Concession-duration/

scope risk: Lisbon–Madrid systems of Zambia renewal risk: German nuclear
high-speed line Operation of Zambian Railway network is phase -out
In 2009, the first 165km section of the concessioned to RSZ (consortium incl. After Fukushima incident, German
Lisbon–Madrid line is awarded to the South African financial institutions and the parliament decides to phase-out nuclear
consortium ELOS World Bank) in 2003 for 20 years power plants by 2022, and cuts individual
Following elections, new Portuguese In 2012, Zambian government cancels plants’ remaining lifetime
government cancels project in 2011 as concession with immediate effect, citing Shorter plant lifetimes cause losses for
part of austerity measures in wake of mismanagement (which is disputed by the Vattenfall of €5 billion, according to press
public-debt crisis17 company)20 —international arbitration is ongoing in
201423

2 Environmental & other 5 Breach of contract risk: 8 Asset transfer risk: Delhi
permit risk: Datteln IV Cochabamba water supply Airport Metro Express Line
power plant International JV AdT receives 40-year Airport high-speed metro line in Delhi is
Affecting E.ON receives construction permit for a concession for water-service operation & based on a BOT contract—termination of
1 GW hard coal block in 2007 expansion in 1999 the contract after 1 year in 2013 due to
specific operational problems
At ~90% completion, court ruling declares After riots against water-tariff increases in
project permits faulty in 2009/10—permit 1999/2000, government revokes contract Termination payment depends on whether
procedure is re-started18 —legal cases with foreign investors settled public authorities are held responsible for
by 200621 the problems—arbitration is pending24

3 Community risk: HidroAysén 6 Asset-specific regulation risk: 9 Decommissioning risk:

Political and regulatory decisions

hydropower Night-flight restrictions at Zurich Offshore installations

International JV HidroAysén gets Chilean Airport near UK coast
government approval for US$3 billion dam Aircraft noise affects residents in 400–500 offshore Oil & Gas installations will
projects in 2011 Switzerland and Germany, motivating decommission by 2030, according to
Local population strongly opposes project regulatory changes (e.g. limitations of estimates, plus offshore wind farms are
(60–75% against, according to opinion approaches from German side introduced being ramped-up
polls)—following protests and lawsuits, in 2003, bilateral treaty with further Cost for decommissioning will greatly
project put on hold in 2012 and finally limitations signed in 2012) depend on environmental standards for
rejected in 201419 Fund is set up to cover costs incurred dismantling, removing and disposing of the
through aircraft noise at night22 installations at end of asset lifetime25

10 Change of industry regulation risk: Spanish renewable subsidy cut

In wake of public-debt crisis, Spain retroactively cuts feed-in tariff for existing solar-power projects in 2010, and in 2014 adopts subsidy system
that stops electricity producers from earning more than 7.5% rate of return over asset’s lifetime
Several operators face bankruptcy—foreign investors file for international arbitration in 201426

11 Taxation risk: “Crisis taxes” in Hungary

Hungary introduces special “crisis taxes” in the energy, retail and telecommunications sectors in 2010, mainly affecting foreign operators
Following EU pressure, certain discriminatory crisis taxes are phased out at end of 2012—but new utility tax is in force since 2013, and future tax situation
for foreign companies remains uncertain in 201427

Affecting 12 Currency transfer and convertibility risk: CADIVI exchange controls in Venezuela
sector Venezuela introduces exchange controls under new Commission CADIVI in 2003: restrictions on currency conversion and profits repatriation for
or entire foreign companies
economy Subsequently, international companies freeze/reduce investment, and foreign-currency scarcity occurs28

13 Judicial risk: Dispute settlement and contract enforcement in Italy

According to Global Competitiveness Report, Italy ranks 143rd out of 144 in efficiency of legal system in settling disputes—companies require
on average 1,185 days to enforce a contract (OECD average = 529 days)
As a result, judicial system is now regarded as impediment to investment and growth29

14 Corruption risk/Market-distortion risk: Corruption related to the Golden Quadrilateral in India

The US$ 13 billion highway network (largest highway project in India) connects Mumbai, Chennai, Kolkata, and Delhi
Launched in 2001 and managed by the National Highways Authority of India (NHAI), the project was at the centre of massive corruption allegations, including
leakage of insider information from NHAI, unlawful sub-contracting, and neglected follow-up of unlawful sub-contracting30

Source: Press reports and public company information

16 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Risks affecting the sector or entire economy in response to increased societal concerns – a move away
from nuclear power stations, for instance, or a drastic
Project-specific decisions are only part of the risk profile. tightening of building codes.
Equally important are sector laws determining the profitability Some business risks (such as commercial risk stemming from
of an entire industry, and general laws that set the rules for false demand estimates) are related to very early decisions
the national economy as a whole. by public authorities – decisions taken during project
prioritization and preparation, even before tendering. These
10. Risk of changes to the regulation of the industry. The risks – as well as their mitigation through a rigorous project-
economic performance of an infrastructure asset is preparation process – are described in detail in an earlier
closely linked to many regulations and is therefore report in this series.31
affected by changes to them. The regulations in question
might be sector-specific, such as rules on the feed-in of Finally, it should be noted that the typical risk profile can
renewable energy or on road usage, or they might be differ significantly between sectors and sub-sectors, some
general laws, relating to labour relations or immigration of which tend to use different delivery modes. For instance,
quotas, for instance. Changes of industry regulations can concessions and PPP contracts are prevalent in road
also put the preservation of a level playing field at risk, if transport, whereas private delivery (often via foreign direct
those changes lead to incumbent or new players being investment) is common in telecommunication. In addition, the
disadvantaged. risk exposure might depend on the origin of an investor: while
most risks affect both domestic and foreign investors, the
11. Risk of taxation changes. Changes to tax rates are a latter group can be more strongly affected by discriminatory
special case of regulatory changes with a direct and regulatory decisions or currency convertibility risk. On the
immediate financial impact. The taxes affected might other hand, some mitigation measures are available only to
again be specific to the sector, or they might be general foreign investors, as explained in the next section.
corporate taxes.

12. Risks associated with currency transfers and
convertibility. International investors expect the liberty
to convert local currency and repatriate profits to their
home countries. They are troubled by the risk that new
legal restrictions might be introduced. This risk is to
be differentiated from the general exchange-rate risk.
Exchange-rate fluctuations – a potentially serious risk
for investors – do depend to some extent on political
decisions, but also on many other macroeconomic
developments that are beyond the control of the national
government.

13. Judicial risk. A further risk to investors is that the judicial
system does not function in a timely, efficient and fully
independent way. The effects can be lengthy legal
processes, unpredictable rulings and the unenforceability
of favourable court decisions.

14. Risk of corruption and market distortion. Corruption and
market distortion are underlying causes of inefficient
political & regulatory decisions, of course, but they also
represent a risk in themselves. For instance, there might
be a demand for side-payments or under-the-table-
arrangements, which in turn might later lead to the
(legitimate) prosecution of any companies involved.

The risks listed above and addressed in the rest of this

report are not isolated from the other risks that infrastructure
investment is subject to. In particular, political & regulatory risk
as a whole can be intensified by fundamental risks that affect
the entire economy – such as the risk of macroeconomic
shocks or the risk of natural disasters. Such risks if they
materialize could undermine a country’s fiscal strength and
have repercussions on political decisions. Natural disasters
are increasingly overburdening countries economically,
especially developing countries. And the evidence shows
such disasters can also trigger momentous political decisions

Mitigation of Political & Regulatory Risk in Infrastructure Projects 17

BOX 2: Root Causes of Political & Regulatory Risk difficulty is caused by functional limitations inherent in political
systems:
By drawing on the social sciences and taking a more
theoretical look at political & regulatory risk, greater insight – The need to maintain the sovereignty of future parliaments:
can be gained into the underlying causes. so law-makers cannot easily make commitments that
extend beyond the next election. Moreover, politicians will
The starting premise is that some degree of political tend to avoid making any substantial decision during the
uncertainty is intrinsic to democratic systems – unavoidable, last few months before an election.
and even desirable in some respects. Consider the following
constraints: – The continuous power struggle between different
governmental levels or agencies (including NIMBY-ism).34
A. The evolving structure of public interests
– The limited capacities of ministries and public agencies: for
The “public interest” as such is not necessarily constant over instance, a shortage of talent and tools (especially in fast-
time. Instead, it might change, owing to two factors. growing countries with a quick ramp-up of infrastructure
programmes), and the presence of corruption. These
– Societal concerns that are inconsistent over time: during challenges create political & regulatory risk on sub-national
the long lifetime of an infrastructure asset, the perception levels as well, for example, in local and departmental
of technological safety or environmental responsibility administrations.
might change, so the risk arises that regulation would
change too.32 C. A misperception by private actors

– Government incentives that are inconsistent over time: Political & regulatory risk can also be caused by private rather
for instance, before the signing of the contract, the than public participants. The investors or developers might
government has the incentive to offer high user-tariffs perceive political decisions as unpredictable and hence
(for electricity or train tickets, say) so that investors will “risky”, even though such decisions are almost inevitable. The
be attracted by the prospect of a high return on their reasons for this faulty perception are:
investment; after the asset has been completed, the
government will favour low user-tariffs, to benefit the – Investors’ inadequate sensitivity to shifting societal
public (the asset will continue operating regardless, as concerns: so the investors would find it surprising when
long as revenues exceed marginal costs).33 political decisions are made in response to public pressure
or are motivated by a new understanding of socially
B. The functional limitations of the public sector desirable policies.35

The “public interest” as an abstract concept does not – Deliberate misrepresentation by the contractors during
necessarily translate directly into political & regulatory bidding, for example, underestimating the environmental
decisions, even if public-sector actors intend it to. This impact or the cost of publicly-funded sections of an asset:
so government intervention is almost certain, yet the
investors would again be taken by surprise.36

18 Mitigation of Political & Regulatory Risk in Infrastructure Projects

 The framework structures the various measures according
1.2 Best-practice framework to responsibility: the public sector is responsible for laying
the foundations of a low-risk environment; the private sector
for risk mitigation has to manage risks efficiently based on those foundations;
and both the public and private sectors are responsible for a
culture of open dialogue.
The landscape of political & regulatory risk is a diverse one,
so a multilayered approach is required for mitigating the risk The following sections discuss the steps all actors must take,
(i.e. reducing the likelihood or severity of adverse events) – starting with the public sector.
multilayered in the sense that both the public and the private
sectors have to take action. This multilayered approach
is reflected in the political & regulatory Risk-Mitigation
Framework shown in Figure 7.37

Figure 7: Risk-Mitigation Framework

x.x Report section

Joint public-private measures
4.
Culture of Management of risk perception Multi-stakeholder dialogue
open dialogue and return expectation beyond specific projects

Private-sector measures
3.1 3.2 3.3 3.4
Appropriate use of Effective interaction Inclusive Responsible
financial instruments with public sector community engagement business conduct

Risk guarantees and Constructive communication Participatory planning and Prevention and prosecution of
political-risk insurances with public agencies low-burden construction illegal or unethical behaviour

Tradeable instruments and Monitoring of political develop- Ongoing community Professional and sustainable
ownership structure ments, and advocacy strategy involvement during operation operations

Public-sector measures
2.1
Rules that are adaptive in a “Stress-tested” regulation that will
Robust infrastructure regulation and contracts predictable way function under unfavourable conditions

2.2
Legal architecture conducive to preserving Non-partisan alignment on infrastructure
General stability of laws and regulation established principles vision and strategic decisions

2.3
Clear agency set-up, and efficient Strict implementation of anti-corruption and
Reliable and efficient administration procurement and permit processes transparency standards

2.4
Reliable dispute-resolution mechanisms Range of dispute-resolution options Effective judicial capacity

2.5
Transnational programme management for
International commitments International investment agreements
cross-border infrastructure projects

Source: World Economic Forum; Boston Consulting Group

Mitigation of Political & Regulatory Risk in Infrastructure Projects 19

2. Public-Sector Measures

2.1 Robust infrastructure as transparent and simple as possible (without being

ambiguous) to ensure that outcomes of regulatory decisions
regulation and contracts are predictable as well for investors that might be new to a
certain country – for example, by drawing on well-established
Many infrastructure sectors are subject to highly detailed international standards.
regulation. The specific regulations, sector codes or
concessions encompass a vast number of aspects and thus “Stress-tested” regulation that will function
need to adapt to the changing technical and socio-economic under unfavourable conditions
environment; contracts can last 20-30 years, after all, and
consequently must have some built-in flexibility.38 Therefore Potential infrastructure investors need to be assured that
the rules may change frequently, but the private sector regulation will remain fairly stable, even when economic or
needs assurance that those changes will be moderate and political conditions are very unstable. If a regulatory framework
calculable. has remained in place through several business cycles, it will
impress investors as especially trustworthy and reassuring.
Rules that are adaptive in a predictable way Policy-makers should aim to build such a track record of
stable sector regulation, but that will obviously take time.
Ensuring that any changes to sector rules are as predictable
as possible is important for maintaining a balance between As for new regulations, policy-makers should consider
public and private interests over time. Automatic adaptation “stress-testing” them – i.e. simulating the impact that adverse
mechanisms are a good way to do that; they buffer economic or other events would have on private operators
exogenous revenue and cost risk, and thereby eliminate the and public budgets. Figure 8 lists various important stress
need for parliament or government agencies to intervene. factors. For such tests, simulations could be conducted jointly
by public and private stakeholders.
– EXAMPLE: In Germany, the guaranteed feed-in tariff
for newly built photovoltaic (PV) plants is automatically EXAMPLE: The Dutch Ministry of Infrastructure and the
adapted every month, based on the amount of PV Environment developed a PPP simulation (“20-30-year PPP
capacity connected to the grid during the previous project in 1 day”), run jointly by the respective public-sector
quarter (which in turn is driven by changes to the cost agencies and concessionaires, to test contracts and learn
of PV capacity, for example). This flexible cap regulation the principles of a PPP arrangement, covering the sectors of
was introduced in 2012. It succeeded in halting roads, buildings, hospitals, schools and water infrastructure,
the regular year-end practice of quickly connecting and involving more than 3,000 people until 2014. The
additional PV capacity to the grid just before the tariff simulation, available in English with training support, is being
was reduced each time. It also reduced the fear of implemented in the United States as well.42
discretionary interventions into feed-in tariffs.39

– EXAMPLE: In Chile, some transportation PPPs
use a Least Present Value of Revenue mechanism.
These variable-term concessions end as soon as the
collected revenue reaches the amount quoted by the
concessionaire during tendering. Used first in 1998, the
mechanism enabled the $400 million extension of the
Santiago–Valparaiso highway to be financed in times of
high economic uncertainty.40

However, automatic adaptation mechanisms cannot cover all

future developments appropriately. PPP contracts in particular,
which typically have a very high level of detail, should allow
options for ad-hoc government intervention as well, though
in a predictable and fair way, of course – for instance, by
specifying contract-termination clauses or options to introduce
competition.41

Finally, infrastructure laws and regulation should be

20 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Figure 8: Stress Test of Infrastructure Regulation Legal architecture conducive to preserving
established principles
Exemplary stress factors for infrastructure regulation
A country’s legal architecture – the methods and barriers
involved in changing the law – can strongly affect the stability
of laws. Policy-makers obviously need the flexibility or “policy
Government changes space” to change regulations according to the public interest,
but they might give some crucial laws a special status. The
Competitor Disaster
contests award happens most common form here is constitutional guarantees, though
other levers exist for enhancing the stability of a set of laws.
Concession/
contract clauses – EXAMPLE: Panama’s Investment Stability Law,
enacted in 1998, guarantees foreign investors stability
PPP legislation
New of their taxation and customs conditions, as well as
Demand falls treatment like locals, for 10 years. As of late 2014, more
technologies
below estimate
emerge than $2.5 billion was registered for protection under the
Sector regulation
law.43
Constitution and
general legal – EXAMPLE: For European Union (EU) member states,
principles European primary law and secondary law generally
Concessionaire Mass
defaults demonstrations have a very stabilizing effect: individual governments
start cannot easily bypass them to change national laws. For
instance, in 1995 EU law prevented the change of the
Italian hydro-dam concession law – a proposed change
Source: World Economic Forum; Boston Consulting Group
that appeared to favour the incumbent concession
holders inappropriately.44

Overall, a country’s constitutional architecture should achieve

2.2 General stability of laws the right balance of power between national, district and

and regulation local levels to ensure they are all included appropriately
into decisions, to the extent that they are affected by those
decisions.
Before making their investment decisions, investors will want
reassurance about not only the specific sector regulation, but Non-partisan alignment on infrastructure vision
also the general stability of laws in the country concerned. and strategic decisions
Much depends on the country’s constitutional and legal
architecture, and the way that strategic decisions are reached In democratic countries, policy-makers are free to go beyond
within a democratic system. a specified quorum and seek a higher consensus for an
important infrastructure decision, i.e. to seek a non-partisan
alignment. While potentially a lengthy process, it would
establish the decision on a broader base, and reduce the
probability that a new government would reverse the decision.
The aim might be to secure a broad consensus not only for
individual decisions, but also for a set of strategic decisions
within a specific sector, and even for a national infrastructure
strategic vision. Such a vision, for example, is promoted by
the Business 20 (B20) Australia Infrastructure & Investment
Taskforce.45

EXAMPLE: In Switzerland, after the failure of earlier rail-

corridor drafts, all political parties in the Federal Council
supported the comprehensive long-term rail concept Bahn
2000, which was approved by 57% of the population in a
referendum in 1987. On the basis of this broad support,
approximately 130 projects worth $6 billion have been realized
and, by 2007, about 70% of the population agreed that the
concept met their expectations.46

Mitigation of Political & Regulatory Risk in Infrastructure Projects 21

2.3 Reliable and efficient Figure 9: Perception of Infrastructure’s Risk of Corruption

administration Assessment of corruption risk along project life cycle

Low Medium High
A country’s executive power has to implement any laws Project selection
affecting infrastructure in a reliable way. This kind of
Planning
trustworthy administration depends on an appropriate agency
Design
set-up and efficient procurement and permit processes, and
on the absence of corruption. Bidding and contracting
Construction
Clear agency set-up, and efficient procurement Rework and changes
and permit processes Inspection
Subscription process and billing
Clear roles and distinct responsibilities among government
Operations and maintenance
agencies are crucial to achieve an institutional framework that
supports infrastructure development.47 Two steps in particular Decommissioning
have proved successful in ensuring a reliable administration:
N = 50 participants from construction, engineering, real estate and other
– An independent regulatory body is almost infrastructure-related industries, mostly chief compliance officers.
indispensable when it comes to mitigating political & Source: World Economic Forum’s Building Foundations against Corruption project,
regulatory risk. Regulatory decisions must be detached 2014

from political sentiments. To ensure the requisite

independence, the principles are: to separate the
body’s funding from public budgets; to select officials
without reference to political considerations; and to
appoint these officials for terms longer than political Strict implementation of anti-corruption and
cycles. transparency standards

EXAMPLE: The Office of Gas and Electricity Markets Administrations cannot be reliable if any public-sector
(Ofgem), the UK electricity and gas regulator, is corruption exists. But corruption is widespread in both
funded by licence fees from the companies regulated, developed and developing countries, and represents a major
and its board members are appointed at different concern in infrastructure industries.51 According to a 2014
times (resulting in a “staggered board”), following a survey by the World Economic Forum’s Partnering Against
competitive process based on competence.48 Corruption Initiative (PACI), the bidding, construction and
inspection phases have an especially high risk of corruption
– Transparent and efficient procurement and permit (see Figure 9).
processes are crucial, and should be guided by
global best practices. According to a 2014 estimate, Accordingly, lawmakers should strive to design and
if all countries committed to specific time limits for implement laws, institutions and practices that prevent and
regulatory and environmental approvals for major penalize corrupt behaviour, which would help to enhance
infrastructure projects, an additional $1.2 trillion of the transparency of regulatory decisions. Many countries
effective infrastructure could be added to the global have adopted international rules, such as the United Nations
asset base by 2030.49 Convention against Corruption, a global, legally binding
standard, and the Organisation for Economic Co-operation
EXAMPLE: An interesting model of best-practice and Development (OECD) Anti-Bribery Convention, which
permit processes is Canada’s “one project, one review” additionally criminalizes bribery of foreign public officials (a
approach for resource projects such as pipelines. In pressing issue, illustrated by more than 400 foreign bribery
2007, the Major Projects Management Office (MPMO) cases concluded since the convention came into force).52
was instituted as the single manager and a strict These standards clearly have to be incorporated appropriately
timekeeper for reviews. As a consequence, the average into national laws, which must then be followed by strict
approval time for large energy projects was reduced enforcement to ensure that the deterrent is real rather than just
from 4 years to 22 months between 2007 and 2011.50 theoretical.

Streamlining institutional frameworks is generally desirable, but EXAMPLE: Among the anti-corruption laws of individual
it should never compromise the integrity of permit processes. countries, the UK Bribery Act is regarded as particularly
Permits must continue to rely on strict environmental strict. Enacted in 2010, it specifies that a company’s failure
standards and social policy objectives, and on minimizing to prevent bribery by employees or associates is a corporate
illegal behaviour. offence, so companies need to ensure that adequate anti-
bribery procedures are in place. The Act allows prosecution of
any individual or company with links to the United Kingdom,
with penalties of up to 10 years’ imprisonment and unlimited
fines.53 However, observers are calling for more stringent
enforcement.

22 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Public-sector receptiveness to corruption (the “demand side”) Range of dispute-resolution options
can be prevented or reduced not only by laws, but also by
organizational processes within administrative bodies – for Disputes will vary in severity, so dispute-resolution options
example, through regular procurement audits based on should likewise be varied, or tiered according to the severity
benchmarks, job rotation for high-danger positions, and of the dispute. The courtroom is not the only arena for
self-disclosure programmes or codes of conduct for officials. discussion!
Also, using technology is a strong enabler for increasing
transparency.54 On the international level, the Group of Twenty To settle disputes, a set of options, which has been used
(G20) established the Anti-Corruption Working Group which, in the context of PPPs, includes mediators, non-binding
in its 2015-2016 working plan, identifies public procurement, expert panels, binding expert panels, national regulators, and
open data, whistleblower protections, immunities for public international jurisdiction or arbitration.56
officials, fiscal and budget transparency, and standards for
public officials as issues meriting particular attention.55 EXAMPLE: Since 2004, Chile has been using permanent
expert panels to resolve disputes in the electricity sector
Ultimately, achieving a corruption-free environment will also (between public and private sectors, and between regulated
require decisive “supply-side” steps by the private sector, companies). Initially, the panels have a conciliation function,
which will be discussed in section 3.4. but cases can be escalated to an arbitration level, where the
panels’ decisions are binding.57

2.4 Reliable dispute- Effective judicial capacity

resolution mechanisms Since some disputes will end up going to court, an effective
judicial process is essential for hearing and resolving them.
Well-developed international standards can guide countries
Even if a highly reliable administration is in place, disputes that want to improve their judiciary; such standards include
may still arise between public and private stakeholders, given the Core Principles of the European Bank for Reconstruction
their differing interests and the very long-term (and naturally and Development (EBRD), the UN Basic Principles on the
imperfect) nature of contracts, not least PPP contracts. These Independence of the Judiciary, and the Bangalore Principles
disputes require prompt and efficient resolution, without of Judicial Conduct.58 Figure 10 summarizes the essential
damaging the long-term relationship between the two parties. building blocks of an effective judicial capacity, and promising
If justice is done in a predictable, timely and efficient way, the measures to acquire them. By conscientiously implementing
risk of inequitable regulatory decisions diminishes. those standards, countries can reduce judicial risks
considerably.

Figure 10: Effective Judicial Capacity

Building blocks for effective

Selected examples
judicial capacity
Independent from government
Allocate new cases
With integrity and impartial transparently
Courts and
judges Having adequate resources Ensure remuneration is
Having appropriate training sufficient to attract and
retain well-qualified judges

Predictable
Clear, relevant, well-reasoned Set benchmark clearance
Decisions rates for key categories of
Within a reasonable time frame proceedings; monitor and
publish actual time spans
Implemented/enforced

Scrutinize new regulation to

Optimal legislative and procedural avoid “open points” or
framework for the judiciary inconsistencies that later
burden the courts

Source: EBRD (2010)

Mitigation of Political & Regulatory Risk in Infrastructure Projects 23

2.5 International For an impression of current arbitration cases, see Figure
11. The set of BITs is by far the most common legal basis for
commitments cases, with the European Energy Charter Treaty of importance
too. Infrastructure-related industries account for 40% of cases
– which is not surprising, given the large volume and long
To reduce uncertainty about national political decisions, duration of many contracts for such projects.
governments can commit to international treaties. International
investment law, an area emerging since the 1950s, is now BOX 3: Protection Clauses in Bilateral Investment
in focus again, in light of ever-increasing global connectivity Treaties (BITs)
and cross-border capital flows. The longer an investment
is committed to, the more important investment protection Though differing in their details, most BITs share the following
becomes – which is why international investment agreements clauses:
(IIAs) are of such relevance for infrastructure assets.
– Absolute protection: including protection from unlawful
International investment agreements expropriation, the right to fair and equitable treatment, full
protection and security, and free transfer of funds.
IIAs define the terms and conditions for private investment in a
given country by nationals and companies of another country. – Relative protection: including national treatment (foreign
Here, the most common form of IIA is the bilateral investment investors treated equally to local investors) and most-
treaty (BIT), signed between a country where potential favoured-nation treatment (treatment equal to that given
investments take place and the home country of potential to investors from a nation that otherwise would be more
investors. More than 2,000 BITs are in force as of 2014 and, favoured).
on average, one to two new treaties are being signed every
week. Increasingly, investment provisions are also being – Dispute resolution: providing for international arbitration
included in multilateral treaties, such as free trade agreements (for instance, at the ICSID forum) to settle disputes
(FTAs), economic partnerships, regional agreements and between investors and the host government. Typically, an
double-taxation treaties. arbitration tribunal comprises three members appointed
as follows: one by the investor, one by the state, and one
The basic idea of all IIAs is to protect foreign investment “neutrally”, according to the terms of the specific BIT. The
from arbitrary governmental actions, by defining a standard tribunal members generally evaluate claims without regard
set of investor-protection clauses and opening the way to to a country’s specific legislation.60
international arbitration in the event of disputes (see Box 3).
Purely domestic investment is not covered. Regarding the In addition to these protection standards, some BITs also
scope of protection, a balance has to be struck between the specify various obligations for investors, as well as other
protection of investors from arbitrary decisions on the one provisions related to investment.61 Investment provisions in
hand, and the “policy space” of countries on the other; that is, other international agreements (such as FTAs) typically include
on their freedom to enact and change regulation according to analogous clauses.
national requirements and priorities.

24 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Figure 11: Newly Registered International Arbitration Cases countries have come to different conclusions, however, and
2013 argue that the IIA regime is in need of reform.64
By legal basis By rules/forum By industry
Looking at the number of BITs in force shows huge differences
Other1
9%
Other
7%
between countries (see Figure 12). A number of them have
Other very few BITs in force,65 and though investment treaties are
industries
European Energy 28% by no means the only way to stimulate investment, those
Charter Treaty
26%
UNCITRAL
35%
countries might consider extending their use of IIAs. In doing
Finance 5% so, they could benefit from international best practices and
the current debate on balanced treaties for sustainable
Oil, gas
& mining development.
27%

Water 2%
IIAs are widely regarded as an effective way of mitigating
ICT 2%
BIT
Transportation 8%
political & regulatory risk. Their shortcomings, however,
65% ICSID
58% are increasingly emphasized by policy-makers and the
Construction 8% Infrastructure-
related = 40% general public alike. Vigorous debate has revolved around
Electric power some topics: for example, whether a broad interpretation of
& other energy
20% protection clauses will limit the policy space for sustainable
development in developing countries inappropriately, and
whether the current arbitration procedures really allow for
1
North American Free Trade Agreement (NAFTA), Central American Free Trade
Agreement, Moscow Convention for the Protection of Investors’ Rights. unbiased and cost-effective rulings.
Note: 57 cases in total (the total “by industry” includes 7 cases under UNCITRAL rules
but administered at ICSID).
UNCITRAL = United Nations Commission on International Trade Law; Recently, IIAs have had considerable media coverage in
ICT = Information and communications technology. developed countries. This has been triggered by controversial
Source: UNCTAD IIA issue notes; ICSID caseload statistics; BCG analysis
claims, such as tobacco companies disputing anti-smoking
policies, and the negotiation of major FTAs including the
Comprehensive Economic and Trade Agreement (CETA)
Macroeconomic and political stability, in conjunction with
between the EU and Canada, and the Transatlantic Trade and
a large and growing GDP, is generally agreed to be a
Investment Partnership (TTIP) between the EU and the United
prerequisite for FDI. As for IIAs’ direct impact, however, the
States. Clearly, methods are being developed for achieving
evidence is mixed. For many countries, IIAs complement other
effective and appropriately balanced BITs. The momentum
steps within a broader economic reform package, and the
has grown since a 2004 update of the US model treaty for
effects are difficult to differentiate.62 As a result, countries have
BITs that introduced flexibility mechanisms such as national
taken different views about the advantageousness of IIAs. For
security exceptions and reservations.66 The 2012 United
example, Mexico currently has in place about 30 BITs and
Nations Conference on Trade and Development (UNCTAD)
10 FTAs with investment provisions. Over the last 20 years,
Investment Policy Framework for Sustainable Development
FDI has been on average about $20 billion per year, while the
provides guidelines on how to negotiate sustainable-
“price tag” over the 20 years has been approximately $270
development-friendly treaties.67 Moreover, the B20
million (paid in 15 arbitration cases). Mexican officials feel
Infrastructure and Investment Taskforce 2014 promotes the
that it has been well worth it: the balance is positive.63 Other
development of a non-binding International Model Investment
Treaty.68

Mitigation of Political & Regulatory Risk in Infrastructure Projects 25

Figure 12: Bilateral Investment Treaties by Country

Number of BITs in force in 2014

None 26–30
1–5 31–35
6–10 36–40
11–15 41–45
16–20 46–50
21–25 More than 50

Note: Data as of July 2014.

Source: UNCTAD Investment Policy Hub (September 2014)
Note: Data as of July 2014.
Source: UNCTAD Investment Policy Hub (September 2014)

In addition to those emerging standards, a number of Other aspects, in addition to transparency, are:
international best practices have been identified, as a guide the prevention of conflicts of interest for arbitrators
for countries that decide to negotiate or renegotiate an IIA. (via a code of conduct,71 fee schedules or caps,
and transparency on third-party financing); and
– EXAMPLE: For a balanced contract – defining the encouraging fast and equitable proceedings at
scope and meaning of protection clauses with great reasonable cost through, for instance, early dismissal
precision and clarity: This approach is especially of frivolous claims and the promotion of options for
important for the fair and equitable treatment (FET) alternative dispute resolution.72
provision, which has become the most frequently
invoked clause in disputes between investors and Transnational programme management for
governments. The interpretation of this clause cross-border infrastructure projects
was sharpened by the North American Free Trade
Agreement (NAFTA) in 1994 and again in 2001. FET Transnational infrastructure projects are one way for countries
was linked to the (well-defined) minimum standard to fulfil their ambition for regional integration. Such ventures
of treatment of aliens under customary international are especially beneficial in regions with many small (and
law, and thereby prevented arbitration rulings from partly landlocked) countries, such as Africa, Europe and
imposing undue limits on national government South-East Asia. Of course, transnational projects do carry
authorities. This standard was subsequently used additional political & regulatory risk, as several legislatures
in model BITs of the NAFTA parties and in further and administrations might be involved, potentially with
treaties.69 incompatible political cycles and conflicting national agendas.
Unilateral changes can affect the overall business case
– EXAMPLE: For a sustainable investment-protection of projects, and international agreements might lack a
regime – reinforcing arbitration’s credibility: One competent supranational authority to enforce them.
aspect is transparency; in response to growing
public concerns, the United Nations Commission on To minimize the political & regulatory risks in this context, the
International Trade Law (UNCITRAL) has developed various countries involved should adopt a comprehensive
and adopted the UNCITRAL Transparency Rules approach to transnational infrastructure programme
for Arbitration, which now apply to new treaties management. The best practices in this regard are outlined
signed after April 2014 (unless parties explicitly in the 2014 World Economic Forum report, Managing
opt out). For example, the rules allow for public Transnational Infrastructure Programmes in Africa –
access to documents and hearings in arbitrations.70 Challenges and Best Practices:

26 Mitigation of Political & Regulatory Risk in Infrastructure Projects

– Establish regional planning for the different infrastructure
sectors, and align on delivery models; harmonize
concession schemes
– Harmonize technical standards and regulation, and
institutionalize cross-border collaboration via a special
agency
– Achieve a balanced allocation of cost, benefit and risk
across countries; for example, by including an arbitrator
such as a regional development bank73

Examples of transnational infrastructure programmes include

the Trans-European Transport Network, the Programme for
Infrastructure Development in Africa (PIDA), and the Master
Plan on ASEAN Connectivity.74

Mitigation of Political & Regulatory Risk in Infrastructure Projects 27

3. Private-Sector Measures

3.1 Appropriate use of − Private insurers. Within the wider insurance markets,
private insurance companies and Lloyd’s syndicates offer
financial instruments protection against political & regulatory risk, both stand-
alone and in combination with commercial risks. These
insurance policies are underwritten by reinsurers.78
Within the framework set by the host government, private
companies have to effectively and efficiently manage the risk For the political-risk insurance market, Figure 14 shows the
inherent in their projects. An array of measures is available to available products classified by risk type (based on the risk
this end, such as financial instruments that allow companies to landscape developed in chapter 1). Protection is offered for
directly address important aspects of political & regulatory risk. both project debt and project equity, and is available for the
fundamental political risks of expropriation, breach of contract,
Risk guarantees and political-risk insurance and currency transfer restrictions and inconvertibility. Those
risks are well standardized (given well-defined trigger events),
Specific financial instruments have been developed to so the risk can be transferred to reinsurers. In contrast,
transfer political & regulatory risk from the project sponsors more “subtle” regulatory risks, such as a change of industry-
and financiers to a party better suited to bearing it (such as specific regulation that adversely affects an asset, are typically
a development bank or an insurance company), and thereby not covered by the available insurance offerings – unless
protect the private sector from adverse incidents. such measures have an excessive impact, and cross the
“threshold” that would classify them as expropriation or breach
The protection is in the form of guarantees or political- of contract, hence the “white spaces” in Figure 14. For those
risk insurance. Some participants differentiate between political risks that are covered, protection is also available in
guarantees, which are activated as soon as a guaranteed combination with other risk types, including commercial risk
payment fails to arrive, and insurance policies, where a claim or force majeure (together with coverage against war and civil
evaluation must occur before payments are made. However, disturbance, for instance, or in the form of “comprehensive
as insurance-type instruments are sometimes also labelled as coverage” offered by export credit agencies). Institutions
guarantees, and vice versa, the terms are not differentiated such as MIGA also offer credit enhancement related to their
in this report. Of course, these instruments come at a cost, guarantees.
depending on the risk profile covered.
MIGA, as well as other multilateral organizations, can extend
The global market for political-risk guarantees/insurance guarantees to developing countries (though currently not to
is substantial: in 2012, the protection policies issued for developed countries) as soon as a cross-border investment is
infrastructure projects in developing countries provided involved.79 In principle, the private insurance market has global
about $83 billion of cover (see Figure 13). Three types of scope, including developed countries. However, instruments
organizations offer instruments; most of the organizations are are not equally available for all countries (especially developing
members of the International Union of Credit & Investment countries); coverage by private insurers is particularly weak for
Insurers (Berne Union):75 early-stage projects in high-risk environments.80

− Multilateral organizations. As part of their mission to The instruments offered by multilateral and national providers
promote development, international financial institutions have various features in common – not just the type of
offer investors insurance against political risk. One risk events that can be insured, but also the sustainability
important institution is the Multilateral Investment standards required for project eligibility. For instance, all
Guarantee Agency (MIGA), an investment-insurance export credit agencies from OECD countries have to follow
facility for developing countries established in 1988 as part the OECD “Common Approaches” for environmental and
of the World Bank Group.76 social due diligence. And, MIGA has defined comprehensive
“performance standards” monitored by dedicated MIGA
− National providers. To promote exports and FDI, many environmental & social staff. The project’s due diligence and
countries operate (quasi-)governmental export-promotion monitoring take considerable effort, but they are worth it, to
agencies or export-import banks, which offer political- ensure that environmental and social standards are met.81
risk guarantees as part of their portfolios. Guarantees are
typically tied to the nationality of the exporter or investor.
Guarantees are also offered as part of official development
assistance.77

28 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Figure 13: Political Risk Insurance Market

Providers of political-risk insurance Issuance of political-risk insurance

Issuance by Berne Union members into developing countries

— Specific political-risk insurance providers,
e.g. World Bank Group’s Multilateral (billion $)1
Multilateral Investment Guarantee Agency (MIGA);
organizations African Trade Insurance Agency Multilateral organizations 83
— Development banks, e.g. World Bank, National providers 3
African Development Bank (AfDB), Asian
Development Bank (ADB) Private insurers
61
— Export credit agencies (ECAs) and export- 2
import banks, e.g. Euler Hermes (Germany), 54
NEXI (Japan), OeKB (Austria), Sinosure 48 2 55
National
providers (China) 43 2
2
— Governmental donors and development 33 41
agencies, e.g. Overseas Private Investment 29 25 35
26 1
Corporation (OPIC) (USA) 1 27
1
— Private insurance companies and Lloyd's 19
17
syndicates, e.g. Chartis Insurance, Zurich, 16
Sovereign Risk Insurance Ltd, Chubb 22 24
17 18
Private insurers 9 12 14 13
— Reinsurance companies, e.g. Munich Re,
Hannover Re, Swiss Re
2005 2006 2007 2008 2009 2010 2011 2012

1
Overall issuance of political-risk insurance, including infrastructure as well as other industries. Numbers are approximate and might not add up to the indicated totals due to
rounding.
Note: NEXI = Nippon Export & Investment Insurance; OeKB = Oesterreichische Kontrollbank.
Source: Berne Union; MIGA World Investment and Political Risk Reports; BCG analysis

Figure 14: Political Risk Insurance Offerings

Political & regulatory risks Other risks

Instrument provider: related to
political &
Multilateral Organizations Affecting specific project Affecting sector or entire economy regulatory risk
1 2 3 4 5 6 7 8 9 10 11 12 13 14
National providers
Expropriation Breach of Currency
Cancellation
& change of
scope risk
Environmen-
tal and other
permit risk
Community
risk

Asset-specific

Taxation risk
regulation risk
Concession
duration/
renewal risk
Asset transfer
risk

Decommis-
sioning risk

Change
of industry
regulation risk

Judicial risk

Corruption
risk/market-
distortion risk

Business risks

Force majeure

...
Private Insurers risk contract risk transfer & con-
vertibility risk

Project Guarantees Guarantees Also

equity (e.g. from MIGA1) offered in
Typically not combina-
Developing Typically not covered covered (un-
countries (unless event is Typically not covered
less event is
tion with
classified
(unless event is classified Credit classified coverage
Project Credit guarantees as expropriation or breach guarantees
as expropriation or as expropria- against
debt breach of contract)
(e.g. from ECA2) of contract)
tion or breach political &
of contract)
regulatory
risk (e.g.
Project Political-risk Political-risk with breach
insurance insurance of contract,
equity (e.g. from private or as
Developed insurance companies) “compre-
countries hensive
Project coverage”)
debt

1
Multilateral Investment Guarantee Agency.
2
Export Credit Agency.
Note: Illustrating primary focus with respect to protection of investment against political & regulatory risk; further offerings possible (e.g. ECAs extending guarantee for developed
economies).
Source: World Economic Forum; Boston Consulting Group

Mitigation of Political & Regulatory Risk in Infrastructure Projects 29

To make the best use of available instruments, infrastructure Tradeable instruments and ownership structure
developers should carefully evaluate the offerings from
multilateral organizations and national providers of all countries Apart from instruments specifically targeting political &
involved in a project. (They should also consider how to best regulatory risk, standardized hedging instruments, traded
structure the international footprint of investors, if appropriate.) on financial markets, can be used to transfer specific risks.
In that way, they might make it possible for projects that Examples include foreign exchange swaps to reduce
appeared unfeasible to be realized after all. exposure to exchange-rate fluctuations, which might be
politically induced; and credit default swaps to hedge the
– EXAMPLE: A MIGA guarantee (against expropriation, public-default risk, which can be related to overall political
breach of contract, transfer restrictions, and war and stability.
civil disturbance) was instrumental in realizing the
DR-7 Samana Highway toll road in the Dominican The issue is that these instruments typically have limits on time
Republic. After several attempts to raise financing and space: they are designed mainly for short-term cover, and
had failed, owing to the perceived risks involved, the are not readily available for all countries. For example, currency
concessionaire Autopistas del Nordeste (AdN) issued swaps for developing countries are often very expensive, and
a MIGA-guaranteed bond worth $162 million to liquidity might be low owing to currency inconvertibility. So the
international investors in 2006, at a rate of 9.4% per instruments are applicable only for certain aspects of the risk
year. The bond was 40% oversubscribed.82 profile – for instance, they have some relevance during the
construction phase.
– EXAMPLE: In 2005, a guarantee covering political
risk, issued by the German export credit agency The ownership structure, as well as the overall financing
Euler Hermes, enabled Deutsche Investitions-und structure, affect an infrastructure project’s risk profile. By
Entwicklungsgesellschaft (DEG), Germany’s investment drafting the ownership and financing structure with great care,
corporation, to invest in the 100-megawatt Embilipitiya and selecting the right partners, a project’s participants can
power plant in Sri Lanka, which was still experiencing considerably mitigate the political & regulatory risk.
an ongoing civil war. The project has now been A number of relevant co-ownership models are conceivable
realized, and has significantly improved power supply (see Figure 15 for an overview):
and development in the region.83
− International co-owners or co-financiers (e.g. multilateral
BOX 4: Extending the Offering of Multilateral Guarantees development banks or institutions from an investor’s
home country). Such an ownership structure might
The important role of guarantees, such as those provided by deter political intervention because any disputes would
MIGA, is widely recognized. To make it even more valuable, now take place at a higher level. The host government
policy-makers might consider extending the offering in two would have to contend not with individual companies,
ways. but with international organizations such as multilateral
development banks, or with governments of other
1. According to their mandate, MIGA and other multilateral countries.
agencies cannot currently extend guarantees for projects
in developed countries, even though investments there are − Joint ventures with the domestic public sector. Such an
increasingly prone to political & regulatory risk as well.84 To arrangement might align interests to a certain extent, as
fill this gap, a truly global multilateral investment-guarantee the public itself would now be a part-owner, and public
agency is needed. Of course, such extension must take into budgets would be affected by regulatory decisions.
account the potential impact on private-sector solutions However, such joint ventures can be highly complex,
already available; it will also have to ensure that developing and could cause additional conflicts, so they should be
countries are not disadvantaged if they have to “compete” undertaken only after very careful assessment.86
with developed countries for guarantees. Further benefits
would emerge if policy-makers could open the way for − Joint ventures with the international private sector. If the
multilateral political-risk guarantees to be offered to domestic local private company or companies could partner with
investors in both developing and developed countries. a large, experienced global company, the private-sector
weight in opposing any threat of adverse intervention
2. At the moment, multilateral development banks and would increase.
agencies tend to offer political-risk guarantees on a project-
by-project basis. This involves detailed analysis of each − Joint ventures with the domestic private sector. By
project, and leaves investors uncertain about cover on follow- partnering with a domestic company, the asset operator
up projects within a given country’s project pipeline. Such might be viewed as more than just a “foreign investor”.
uncertainty was addressed in 2013 by a B20 White Book
proposal to the G20 in Russia (and some further offerings − Community co-ownership/co-financing. Such an
are now available or are being developed). By implementing ownership structure would get local citizens involved
programmatic guarantee packages to be negotiated with a economically – notably, the residents of the affected areas
given country, policy-makers could reduce transaction costs – and would thereby gain community support.
and send a positive signal to potential investors.85

30 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Figure 15: Options for Co-Ownership/Co-Financing

Multilateral development banks as co-owners/co-

financiers, e.g. World Bank, African Development
Bank
International National export-import bank or other public
corporation from investor’s home country as co-
owner/co-financier, e.g. Canadian Commercial
Corp.
Public

National government as co-owner,

e.g. via national development bank
Domestic
Regional states or municipalities
as co-owner

Joint venture, e.g. with company experienced on

International global playing field

Joint venture, e.g. with company that

Private Domestic has close ties to public sector

“Civic” shares or bonds offered to

Community local residents

Source: World Economic Forum; Boston Consulting Group

One other approach to mitigating political & regulatory risk BOX 5: Infrastructure as a New Standardized Asset Class
is to involve a public international body not as co-owner, but
as commercial counterparty to the tendering government. The risk characteristics of infrastructure investments are rather
In this arrangement, the concession contract is signed as a different from those of other asset classes, such as equities
government-to-government contract and then subcontracted or corporate bonds – notably, stable and inflation-hedged
to private parties. For future negotiations, this levels the returns, as well as lower systematic risk.88 Many projects
playing field far more than when private parties have to face therefore offer attractive risk-adjusted returns, with higher
adverse regulatory decisions alone. recovery rates and lower defaults than comparable corporate
bonds.89 Recently, international debate has intensified on
EXAMPLE: Consider the involvement of Canadian ways of standardizing infrastructure securities and enabling
Commercial Corporation (CCC), a public body of the infrastructure debt to become a tradeable asset class,90
Canadian government, in the construction of Quito airport which could improve the attractiveness of investments for
in Ecuador. Quiport, a joint venture of Canadian Aecon and institutional investors at large. And that, in turn, would have
Brazilian Andrade Gutierrez, won the concession for the $700 an effect on risk – not to mitigate it per se, but to make it
million project in 2002. The city of Quito signed a fixed-price easier to transfer. Long-term investors, such as pension funds
engineering-procurement-and-construction contract with or insurers, would be better able to monitor their investments
CCC, which in turn subcontracted 100% of the project to the because a tradeable asset class would allow benchmarks to
Quiport consortium. In 2009, a dispute arose after Ecuador’s be developed. Furthermore, investors could respond more
constitutional court ruled that private airport fees were state easily to changes in the political & regulatory risk landscape
property; with the help of the Canadian government, the and adjust their asset allocation, and could thus “discipline”
parties resolved their differences, and construction could government behaviour by deterring adverse interventions in
continue.87 the first place.

With the right ownership and commercial-counterparty EXAMPLE: Standardization’s success is illustrated by
structures in place, investors should consider encouraging catastrophe bonds (cat bonds), which allow the transfer,
domestic banks to participate in financing infrastructure via capital markets, of fiscal risks resulting from natural
projects; the international community might be more catastrophes. Natural disasters pose substantial fiscal risks:
confident if local banks are involved. Finally, from a financial- insured catastrophe losses exceeded $100 billion both in
market perspective, infrastructure debt could become a 2005 (Hurricane Katrina) and in 2011 (the earthquake in
tradeable asset class if infrastructure securities would be north-eastern Japan). To deal with those peak damages,
further standardized, allowing investors to respond more cat bonds came into play, exploiting the expertise of (re-)
easily to regulatory changes (see Box 5). insurance companies on private capital market financing.
Standardized claim procedures and payment terms have
helped cat bonds to be rated by rating agencies, making
them more interesting for institutional investors. In 2006,
Mexico was the first country to issue a standardized cat
bond, supported by Swiss Re. As of late 2014, cat bonds
of over $20 billion had been issued in a rapidly growing
market.91
Mitigation of Political & Regulatory Risk in Infrastructure Projects 31
3.2 Effective interaction with case of difficulties, both before and after the construction
period. This is one way to avoid the pattern of “seeing
the public sector each other during tendering, and then again in court”.93

To mitigate political & regulatory risk, private companies As infrastructure sectors are highly regulated, optimizing
should make a conscious effort to facilitate constructive communications with public agencies is strategically
interaction with the public sector. Such interaction will prevent important for private companies, which need to embed this
misunderstandings, create transparency on the impact of responsibility at a high level within their organizations.
regulations for the public and private sectors, and contribute
to an overall mutually beneficial atmosphere. Monitoring of political developments, and
advocacy strategy
Constructive communication with public
agencies Given the importance of regulation, communications between
the public and private sectors should not be limited to
Just as political & regulatory intervention can occur at any specific projects, but should extend to matters of industry-
time during the life cycle of an infrastructure project, so can wide regulation. In that way, political decisions can take the
a well-designed communication initiative, whose details will industry’s views into account, and will not come as a surprise.
vary according to a company’s presence and activities in the Figure 16 outlines one approach to regulatory engagement.
country and sector. Some principles, however, will apply in It starts with an unbiased trend analysis, which could be
most cases: conducted by external experts as the company might be
overconfident about the accuracy of its own world view. With
− Avoidance of strategic misrepresentation. From the the potential for major regulatory changes, it becomes even
beginning, bidders should refuse to give any misleading more important for the private sector to engage proactively in
information during bidding and contract negotiation, developing a target regulation and an appropriate advocacy
even if such information is accepted (or even demanded) strategy.
by public-sector representatives. For instance, bidders
should not conceal any suspected problems that their In many cases, a joint industry approach on the national
construction plans might encounter.92 or international level is the most effective way to secure an
appropriate regulatory regime.94
− Proactive sharing of information. Conscientious
communication will reassure the public-sector agency EXAMPLE: The International Air Transport Association
regarding successful delivery, and reinforce its trust in (IATA) engaged with stakeholders after 9/11 to standardize
the private company’s effort. For instance, the company previously uncoordinated international rules on airport
should provide timely and comprehensive reports on security procedures. The new standard, agreed by 19 key
progress and issues during the construction phase. governments, is being rolled out globally from 2014 to
improve travellers’ experience while keeping security tight at
− A single, continuous point of contact. By employing airports.95
a single individual or group to provide regular
communication over the entire life cycle, the company Ultimately, any proposed regulation’s credibility will depend
will more easily build trusting relationships. The public- on the balance maintained between various interests. Hence
sector agency will know with whom to speak, as well as the need for multistakeholder approaches, to be discussed in
the appropriate contact in the organizational hierarchy in chapter 4.

Figure 16: Approach to Regulatory Engagement

Continuous monitoring of relevant developments in society and politics

In case of major potential changes:

Unbiased Development of Development of

situation analysis target regulation advocacy strategy
Study of underlying societal Derivation of implications of Advocacy strategy towards
trends scenarios on asset target scenario
Understanding of political Development of realistic Identification of partners,
stakeholders’ interests vision of regulation from possibly pursuing
industry point of view multistakeholder approach
Scenario analysis

Source: BCG case experience

32 Mitigation of Political & Regulatory Risk in Infrastructure Projects

3.3 Inclusive community – EXAMPLE: The construction of the €130 million
Hubertus tunnel in The Hague caused concerns about
engagement the settling of soft soil in a prestigious residential area.
In response, the contractor installed a €2 million sensor
The private sector will also need to engage constructively system, monitoring ground behaviour in real time and
with the public at large. By involving the affected communities visualizing the data online. When an abnormal settling
throughout the asset’s life cycle – from planning and of soil was detected, automatic emails sent to relevant
construction through to operating the asset – companies can residents explained the company’s actions. The
reduce the chance of political intervention. residents trusted the approach and therefore refrained
from taking legal action, thereby avoiding an estimated
Participatory planning and low-burden one-and-a-half-year delay.98
construction
– EXAMPLE: The redevelopment of Berlin’s Potsdamer
Most infrastructure projects are highly advantageous for Platz area and traffic junction – the largest construction
broader society, but they can also have an adverse impact site in Europe at the time – was supported by the
on a local community. Thus, it is advisable to engage “Infobox”, a three-storey, temporary information
the community early on, and continue that engagement building. Here, anyone could get details of the
throughout. Relevant actions include the following: project’s aims, progress and long-term advantages.
Between 1995 and 2001, the Infobox had more than
− Early consultations. Environmental- and social-impact 9 million visitors, and the scheme is now regarded
assessments will be part of the planning process, and as a blueprint for successful construction-site public
these should include early and meaningful community relations.99
consultations through appropriate formats. Such
consultations will help to ease local anxieties, and improve Ongoing community involvement during
the project design by taking the community’s concerns operation
into account.96
Engagement with the community should not end when
− Low-burden construction. In many projects, the construction is finished. Public support for the infrastructure
construction period creates the largest disruption for local asset is likely to require ongoing engagement, including
residents. By incorporating suggestions from community activities in the following areas:
consultations, companies can keep that disruption to a
minimum; for example, well-planned route management – Education on operations. Various measures are available
will make construction traffic more bearable for residents.97 to increase the public’s understanding of the business
and their positive involvement with it, such as railway
− Continuous communication. Starting in the planning museums, guided tours in ports and viewing decks in
period, and continuing during construction, project airports.
developers should communicate with local residents on
progress and potential impacts – to satisfy curiosity, allay EXAMPLE: At the Walchensee hydro plant in Germany,
justified fears and dismiss those unjustified, and generate the operator E.ON opened an information centre in 2001,
a positive public involvement with the project. which also offers tailored programmes for school classes.
Although located in a lightly populated area, it now attracts
more than 100,000 visitors per year.100

Mitigation of Political & Regulatory Risk in Infrastructure Projects 33

 – EXAMPLE: The Pearl Initiative in the Arab world
– Reporting on social and environmental impacts. includes more than 30 international companies
Transparent communication on the social and committed to promoting transparency, accountability
environmental impact of operations is extremely important, and corporate governance, particularly through
and can be included in standard health, safety and education and knowledge creation. One concrete
environment processes. It should be made in an easily outcome is the Centre of Excellence for Applied
accessible format for the target audience – for instance, Research and Training at the American University of
short online updates instead of detailed technical Sharjah, United Arab Emirates, which has been set up
reports.101 to share best practices and lessons learned to create a
culture of transparency and accountability.105
– Participation in follow-up developments. With any major
refurbishments or extension projects, companies should – EXAMPLE: Another emerging government-corporate
again ensure that the community gets involved in the collaboration is the high-level reporting mechanism
planning and construction process. (HLRM) developed by the Basel Institute on
Governance and the OECD. It provides companies
with a dedicated and high-level institution to report any
3.4 Responsible business bribery solicitation occurring during public procurement
processes, and so helps to resolve issues while
conduct tenders are still open. In April 2013, Colombia became
the first country to introduce the HLRM, with the 4G
Responsible business conduct is a prerequisite for (Fourth Generation of Road Concessions) Program
sustainable economic success. If the society at large accepts serving as a pilot.106
the behaviour of infrastructure operators, stakeholder
satisfaction will increase and the likelihood of policy-makers Professional and sustainable operations
intervening will be reduced.
Figure 17: Private-Sector Anti-Corruption Measures
Prevention and prosecution of illegal or
unethical behaviour
Company- Define consistent compliance
internal standards
Illegal or unethical behaviour – above all, corruption – is not
Establish dedicated unit to
only unacceptable from a societal point of view, but also a enforce standards
major source of risk for individual companies. The public- Run training programmes on
sector measures to counter such behaviour are discussed in standards and tools to identify
section 2.4; the private sector likewise has a responsibility to and manage risks
avoid or eliminate this behaviour. Figure 17 shows a three-step Set up straightforward
approach to that end:102 process to deal with cases

1. Company-internal measures. The first step is putting Third-party Set clear rules for dealing with
one’s own house in order. Most companies now have involvement third parties (e.g. joint-venture
compliance standards in place, and run related training partners, suppliers), including
courses for their staff. Beyond prevention, a best-in-class due diligence at start of
cooperation, and process for
company will also be ready to take legal action, and will cases
prosecute cases in a professional and effective way. All
measures should lead towards a corruption-free company
culture. Collective Pursue collective action with
action other private-sector
participants to curb corruption
2. Third-party involvement. A substantial risk of corruption (e.g. via
can arise from third parties, such as joint-venture partners business chambers)
and suppliers. Clear rules will help to minimize that risk.
Recommendations include due diligence at the beginning
Source: World Economic Forum, PACI
of any cooperative venture (guidelines are available from
PACI),103 and skilful handling of upcoming corruption
cases.

3. Collective action. Ultimately, single actors cannot create
a corruption-free environment; instead, a joint effort by
all relevant parties is required. Depending on the specific
issue, such an effort might involve collective action by
the infrastructure industry, the business community as a
whole, or by a larger group of public, private and societal
stakeholders.104

34 Mitigation of Political & Regulatory Risk in Infrastructure Projects

 also need to manage them sustainably, which involves
Preventing illegal behaviour is not the only social responsibility respecting norms on employment, human rights, the
that companies must undertake. Since infrastructure delivery environment and other areas. These norms are codified
often provides vital services to communities, companies in international standards, such as OECD guidelines
also have a social responsibility to conduct operations in a for multinational enterprises and for private-sector
professional and sustainable way. By doing so, they would participation in infrastructure,109 and are extensively
also succeed in forestalling regulatory intervention. discussed in the literature on corporate social
responsibility.110
– Professional operations. Society at large has two main
interests regarding the operation of an infrastructure EXAMPLE: The Equator Principles set standards for
asset: providing adequate quality and affordable service, assessing and managing environmental and social risks
and avoiding adverse incidents. An operator’s core in project financing. Originally signed in 2003, they have
business is to develop and implement procedures that been adopted by 80 financial institutions as of late 2014,
serve these interests. To complement existing processes, covering over 70% of finance debt for international
the International Organization for Standardization (ISO) projects in emerging markets and thus contributing to
is developing a standardized framework – notably, more sustainable project delivery.111
the ISO 55000 series for general standards of asset
management, and sector-specific requirements such as
ISO/TC 224 for drinking- and waste-water systems.107
Stringently implementing those norms can contribute to
professionalizing operations.

– Sustainable operations. Besides managing their
operations in a properly professional way, companies

Mitigation of Political & Regulatory Risk in Infrastructure Projects 35

4. Joint Public-Private Measures

To thrive, infrastructure investment needs more than just

“hard” measures such as contracts and financial instruments;
it requires a spirit of cooperation as well, where public and
private sectors understand and trust each other. A prerequisite
for trust of this kind is open dialogue about not only individual
projects, but also the overall vision for infrastructure, and
the way that the two sectors can work together to produce
success on both sides.

Management of risk perception and return

expectation
Public and private sectors often have very different views
on the risks related to infrastructure projects. For potential
investors, higher perceived risk translates directly to higher
expectations on returns; thus, risk perception needs to be
adequately managed. Potential investors might withdraw if
they regard the risk as prohibitive or the predicted returns as
too low. And governments, meanwhile, might regard high-
return expectations as “greedy” if they fail to understand the
risk assessment made by potential investors.

Related to this, some government officials and investor

groups argue that the risks of investing, especially the political
& regulatory risks, are “misperceived” in certain regions of
the world, such as Africa.112 To reconcile risk perception and return, even if the risk involved is very high. International
return expectations for potential investors, governments will best practices for investment marketing are exemplified by
need to address the following four features: successful agencies from OECD countries, such as ABA-
Invest in Austria or Czech Invest.114 IPAs can contribute to
– Preparing projects rigorously. The preparation of any a culture of open dialogue by also taking on the role of bi-
infrastructure project, especially PPPs, has to follow directional communicator: on the one hand, explaining the
a rigorous process, including an unbiased and robust country’s regulatory landscape to potential investors, while
feasibility study as the basis for estimated rates of on the other, listening to potential investors’ concerns and
return. (This process is discussed in detail in Strategic then acting as “change agent” to achieve an appropriate
Infrastructure: Steps to Prepare and Accelerate Public- balance between flexibility for the policy-maker and stability
Private Partnerships, an earlier report in this series.) A for those investors.
typical danger is that of over-optimistic demand estimates;
this should be addressed by a sophisticated forecasting – Sounding out the market. To initiate a dialogue and
methodology and a scrupulous review process, using gauge the level of market interest, public agencies
risk-averse reviewers and reference-based forecasting, should test their view of a project early on by seeking
for example.113 In addition, projects to be tendered should the opinions of experienced companies. The companies
specify adequate requirements allowing for long-term should be encouraged to provide open feedback on their
operation (for instance, resilience to climate-change view of the project’s scope, conditions, risk and overall
impact) to reduce the likelihood of necessary regulatory attractiveness.115
interventions in the future.
– Preparing comprehensive tender documents. When
– Marketing investment opportunities. Typically, a dedicated a project is put out to tender as a PPP or for private
investment promotion agency (IPA) will be responsible delivery, the request for proposal will typically be a lengthy
for attracting investment into a country. To manage document and needs to be well-structured, consistent and
expectations, IPAs must not only highlight the advantages comprehensive. The document’s figures, such as demand
of investment opportunities, but also not “promise” estimates and the estimated rate of return, should be
unrealistic rates of return. This is especially true of vital underpinned by transparent analysis, including an overview
services, as the general public would typically find it of risks involved, and by background information such as
unacceptable that operators receive very high rates of historical timelines of relevant data.
36 Mitigation of Political & Regulatory Risk in Infrastructure Projects
For all these activities, the public sector clearly is in the driver’s – EXAMPLE: The Hydropower Sustainability
seat. But for meaningful results, private-sector participants too Assessment Protocol, launched in 2011, followed
will have to be actively engaged, sharing their views frankly discussions between the hydropower industry, banks,
and contributing fully to a dialogue on upcoming projects. governments, academia and non-governmental
Various broker organizations, such as UN programmes, and organizations on sustainable ways of delivering hydro-
development agencies can act as facilitators in the process, dam projects. Governed by a multistakeholder council,
especially in countries that have limited experience with public- it provides a tool for reviewing and benchmarking
private cooperation.116 projects with respect to their environmental, social,
technical and financial implications. As of late 2014,
Multistakeholder dialogue beyond specific more than 15 assessments had been conducted
projects across five continents, and the EU has decided to
adopt the protocol to assess European hydropower
Individual infrastructure projects involve many complexities projects.117
that private companies must discuss with public-sector
agencies and local communities (see sections 3.2 and 3.3). – EXAMPLE: The World Economic Forum’s Business
But the various stakeholders should look beyond individual Working Group on African infrastructure brings together
projects, and use the opportunity to develop a joint view on private companies, multilateral development banks,
infrastructure in the wider context: What are the key obstacles NGOs and regional experts to promote developing
to infrastructure development? What are the possible levers the region’s infrastructure. The initiative’s focus is
for acceleration? And, what should be the contribution of each on creating a replicable acceleration process that
party? After all, on a larger scale, the interests of the public meets the needs and constraints of both public and
and private sectors are often aligned, and a multistakeholder private stakeholders. In 2013, the group devised a
dialogue should reinforce this alignment and encourage methodology for selecting projects for acceleration. A
mutual understanding. pilot programme was selected – namely, the Central
Corridor,118 which comprises 121 individual projects. In
subsequent dialogue sessions, the group identified 18
of the projects for presentation at an investor forum in
March 2015.119

Mitigation of Political & Regulatory Risk in Infrastructure Projects 37

5. The Way Forward

Modern infrastructure is crucial for economic development. While the impact of any measure clearly depends on its exact
It boosts inclusive growth in developing countries, maintains specification, the mapping conveys the clear message that
prosperity in the developed world and ensures a more no silver bullet and no single overall remedy exists. Specific
sustainable and less carbon-intensive economy worldwide. individual measures – international investment agreements,
One of the strongest impediments to increased infrastructure say, or risk insurance policies – might serve very effectively
investment is political & regulatory risk, a major disincentive to mitigate specific risks, but they will have no impact at
to private investors. A government can turn projected all on other types of political & regulatory risk. And, many
highways, power plants and other infrastructure assets – private-sector measures might have a broad effect, but will
urgently needed for a country’s economic progress and the make their impact only indirectly. Therefore, many if not all of
population’s welfare – into reality by resolutely addressing and the various measures must be adopted in order to reinforce
reducing this risk, and thereby encouraging investment. and complement one another. The framework developed
Political & regulatory risk comes in many different forms and in this report duly encourages a holistic perspective: users
has a range of remedies, as outlined in this report. Figure 18 can “check” each lever in turn, guided by international best
maps the mitigation measures onto the various risk types. practices, and decide whether it needs improvement.

Figure 18: Mapping of Risk Types and Mitigation Measures

pact
ing – Im Affecting specific project Affecting sector
e m p la ry mapp depend on or entire economy
Ex ures wil
l
ontext
Planning/Design/
Operation Termination
of meas untry/sector c Construction
e c if ic co
s p 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Cancellation
& change of
scope risk
Environmen-
tal and other
permit risk

Community
risk

Expropriation
risk

Breach of
contract risk

Asset-specific
regulation risk

Concession
duration/
renewal risk

Asset transfer
risk

Decommis-
sioning risk

Change
of industry
regulation risk

Taxation risk

Currency
transfer & con-
vertibility risk

Judicial risk

Corruption
risk/Market-
distortion risk
Mitigation measures addressing these Risk types

Section: Public-sector measures

2.1 Rules that are adaptive in a predictable way
“Stress-tested” regulation that will function under unfavourable conditions
2.2 Legal architecture conducive to preserving established principles
Non-partisan alignment on infrastructure vision and strategic decisions
2.3 Clear agency set-up, and efficient procurement and permit processes
Strict implementation of anti-corruption and transparency standards
2.4 Range of dispute-resolution options
Effective judicial capacity
2.5 International investment agreements
Transnational programme management for cross-border infrastructure projects

Private-sector measures
3.1 Risk guarantees and political-risk insurances
Tradeable instruments and ownership structure
3.2 Constructive communication with public agencies
Monitoring of political developments, and advocacy strategy
3.3 Participatory planning and low-burden construction
Ongoing community involvement during operation
3.4 Prevention and prosecution of illegal or unethical behaviour
Professional and sustainable operations

Joint public-private measures

4 Management of risk perception and return expectation
Contribution to a culture of open dialogue
Multistakeholder dialogue beyond specific projects

Risk directly addressed Risk indirectly addressed Risk not addressed

Source: World Economic Forum, Boston Consulting Group

38 Mitigation of Political & Regulatory Risk in Infrastructure Projects

Imperative for action The international community might want to consider
enhancing multilateral measures, for example by broadening
Mitigating political & regulatory risk enough to boost private- the availability of guarantees to fill the “white spaces” in
sector investment is a huge challenge, and will take a the political-insurance offerings, or by developing further
dedicated effort by all stakeholders involved. international investment agreements. The standardization
of infrastructure securities is another area that might need
The public sector, being responsible for setting the regulatory enhancement.
framework, should carefully evaluate which risk types are most
important, and continue working on measures that address A balanced and conducive regulatory environment with
those risks (see Figure 18). low political & regulatory risk is not something that can be
created overnight. It will emerge only through a sustained
The private sector should maintain or intensify its engagement. and cooperative effort from all stakeholders. The effort will be
Certainly, companies and investors will want to continue worth it, however, by narrowing the infrastructure gap and
assessing the political & regulatory risk very carefully (i.e. the thereby benefiting society at large.
likelihood and impact of adverse decisions) before committing
to a project.120 In doing so, they should consider the available
risk-mitigation measures described in this report, and should
help to build a culture of open dialogue beyond specific
projects.

Mitigation of Political & Regulatory Risk in Infrastructure Projects 39

Abbreviations

4G Fourth Generation (of road concessions programme – Colombia)

ADB Asian Development Bank
ASEAN Association of Southeast Asian Nations
BCG The Boston Consulting Group
BIT Bilateral Investment Treaty
Cat bonds Catastrophe bonds
CCC Canadian Commercial Corporation
CAFTA Central America Free Trade Agreement
CETA Comprehensive Economic and Trade Agreement
EBRD European Bank for Reconstruction and Development
ECA Export Credit Agency
EIB European Investment Bank
EPC Engineering-Procurement-and-Construction
FDI Foreign Direct Investment
FET Fair and Equitable Treatment
FTA Free Trade Agreement
GDP Gross Domestic Product
HLRM High Level Reporting Mechanism
HSE Health, Safety and Environment
IATA International Air Transport Association
ICSID International Centre for the Settlement of Investment Disputes
IFC International Finance Corporation
IIA International Investment Agreement
IPA Investment Promotion Agency
ISO International Organization for Standardization
LPVR Least Present Value of Revenue
MPMO Major Projects Management Office
MIGA Multilateral Investment Guarantee Agency
NAFTA North American Free Trade Agreement
NGO Non-Governmental Organization
NIMBY “Not in my back yard”
OECD Organisation for Economic Co-operation and Development
OPIC Overseas Private Investment Corporation
PACI Partnering Against Corruption Initiative
PIDA Programme for Infrastructure Development in Africa
PPA Power Purchase Agreement
PPP Public-Private Partnership
PV Photovoltaic
RFP Request for Proposal
SDG Sustainable Development Goal
TEN-T Trans-European Transport Network
TTIP Transatlantic Trade and Investment Partnership
UNCITRAL United Nations Commission on International Trade Law
UNCTAD United Nations Conference on Trade and Development
UNECE United Nations Economic Commission for Europe
USAID United States Agency for International Development
WAIPA World Association of Investment Promotion Agencies

40 Mitigation of Political & Regulatory Risk in Infrastructure Projects

 Planning/Design/Construction phases Operation phase Termination phase
Risk factor

Site risk, e.g. difficult geological conditions Commercial risk, e.g. false demand estimate End-value risk, e.g. under-maintained asset
Business factors
Physical conditions/ Design risk, e.g. inadequate planning Operating-cost risk, e.g. wage increase
Demand side/
Business partners/ Construction risk, e.g. cost overrun Performance risk, e.g. unavailability
Own performance
Financing risk, e.g. failure to place bond Re-financing risk, e.g. floating interest rates
Focus of report
1 Cancellation & change of scope risk 4 Expropriation risk 7 Concession duration/renewal risk
Regulatory Risk

e.g. rejection of PPP contract by parliament e.g. nationalization e.g. early termination
Affecting 2 5 Breach of contract risk 8 Asset transfer risk
specific Environmental & other permit risk 5
e.g. delay of construction permits e.g. denial of payment e.g. dispute over asset quality
project
3 Community risk 6 6 Asset-specific regulation risk 9 Decommissioning risk
e.g. non-approval by native populations e.g. operating time restrictions for airports e.g. tightened disposal requirements

Political &
10 Change of industry regulation risk, e.g. feed-in tariff cut, change of emission laws, change of labour laws, foreign-ownership restrictions
regulatory
decisions 11 Taxation risk, e.g. introduction of special taxes, increase in corporate tax rate
Affecting
sector or 12 Currency transfer & convertibility risk, e.g. interdiction of profit repatriation
entire
economy
13 Judicial risk, e.g. lack of predictability and timeliness of court decisions, uncertain enforceability of legal titles

14 Corruption risk/Market-distortion risk, e.g. demand of side-payments by agencies; opaque procurement processes

Macro- & socio- Risk of change to macro-economic fundamentals, e.g. economic crisis, exchange rate volatility, interest rate volatility, inflation
economic
environment Risk of change to socio-economic fundamentals, e.g. ageing society, xenophobia
Appendix: Landscape of Political &

Risk of man-made events, e.g. war, terrorism, civil disturbance, labour strike/industrial action
Force majeure
Risk of natural disasters, e.g. earthquake, flooding, hurricane, landslide

Source: World Economic Forum; Boston Consulting Group

Mitigation of Political & Regulatory Risk in Infrastructure Projects

41
Endnotes
1
That is why multilateral development banks such as the Asian 32
The perception of technological, societal, geopolitical, environmental
Development Bank or the World Bank spend up to 50% of their and economic risks is discussed in the World Economic Forum’s annual
resources on infrastructure development. See Adam Smith International Global Risks reports. See World Economic Forum (2014a).
(2012). 33
For a detailed discussion of the “time inconsistency problem”, see
2
These estimates apply specifically to public-sector investment into Helm (2010); Kydland and Prescott (1977).
infrastructure. The effect is lower in emerging markets, because of 34
The “not in my back yard” (NIMBY) principle is opposition to new
the generally lower efficiency there of public-sector investment. See developments that are close to a particular municipality, neighbourhood
International Monetary Fund (2014). or the like.
3
The Sustainable Development Goals (SDGs), being prepared by 35
This inadequate understanding of changes in societal concerns
the international community, are due to succeed the Millennium has two broad causes: organizational malfunctioning and individuals’
Development Goals, and should be approved by 2015. See UNCTAD cognitive biases, such as projection bias, optimism bias or selective
(2014a). perception. See Baron (2007).
4
See the recommendations in The Global Commission on the Economy 36
On the phenomenon of strategic misrepresentation in megaprojects,
and Climate (2014). see Flyvberg et al. (2002); Flyvberg (2005).
5
See the detailed discussion in World Economic Forum (2013a), in the 37
In this report, “risk mitigation” is understood in a broad sense,
“Introduction: The PPP Project Preparation Gap” section. involving measures to reduce the likelihood of risk events as well
6
B20 Australia (2014). as measures to reduce the severity or impact of such events. In
7
For a detailed description of PPPs and their variants, see World the classical schema, risk management consists of three steps: (i)
Economic Forum (2013a). identification of risks; (ii) assessment of risks; and (iii) solution to risks
(risk mitigation is one option in step (iii); the other options are avoidance,
8
Other reasons include a lack of bankable projects, and financial transference and acceptance). For further discussions, see ISO (2009);
regulations’ limiting investment into the infrastructure asset class. Dorfman (2007).
9
If other arbitral rules, such as United Nations Commission on 38
A concession is a frequent and flexible contractual structure used
International Trade Law (UNCITRAL), are taken into account, the for implementing infrastructure assets. It can be broadly defined as a
figure is even higher. Almost half of all these cases were filed against business operated under a contract, often with a degree of exclusivity
developed states in 2013. See UNCTAD (2014b). within a certain area and within a limited time frame – typically 20 to 50
10
See Berg and Tschirhart (1988) for a comprehensive overview of the years. It is often seen in the port, airport and road sector, as well as the
regulation of natural monopolies. power sector in the form of a power purchase agreement.
11
See World Economic Forum (2014e).
39
See EEG (2012); BMWi (2014); Unitcell (2012).
12
This definition of risk is more specific than the ISO conceptualization,
40
See Gómez-Lobo/Hinojosa (2000); Engel et al. (2001); Vassallo
which defines risk broadly as “effect of uncertainty on objectives”; see (2006).
the risk management standard 31000 (ISO, 2009). In this report, the 41
See World Economic Forum (2013a), section 3.6.
terms “risk” and “uncertainty” are used interchangeably.
42 See Rijkswaterstaat (2010); additional details from discussions with
13
See World Economic Forum (2013a), section 3.3. Dutch experts.
14
More specifically, political risks result from decisions by legislative 43
See Government of Panama (1998); US State Department (2013);
bodies (i.e. laws), and regulatory risks result from decisions by executive Business Panama (2014).
authorities. The borderline between these two decision-making groups
varies from country to country, so this report examines the two types of
44
Similar cases occurred in France and Spain; see European
risk together. Commission (2005a, 2006).
15
The structure and naming of life-cycle phases vary according to
45
See recommendation I&I1B in B20 Australia (2014).
the sector and the organization managing the project (see Project 46
See Schweizerische Eidgenossenschaft (2009, 2014); Infras (2007).
Management Institute (2008)); the nomenclature used in the risk 47
See Jooste/Scott (2011), and the discussion in World Economic
landscape is a simplified version of that used in Prieto (2013). Forum (2013a), section 4.1.
16
In certain cases, environmental-impact studies are necessary not only 48
See Ofgem (2014a, 2014b); The Guardian (2014).
for individual projects but also for a larger ecosystem – for example, for
an entire series of linked hydro dams. See USAID et al. (2010). 49
See B20 Australia (2014), recommendation I&I4.
17
See The Guardian (2011); Railway Gazette (2012a). 50
See Northern Pipeline Agency Canada (2012); The Globe and Mail
(2011); Government of Canada (2007).
18
See E.ON (2014); Frankfurter Allgemeine (2014); Handelsblatt (2012).
51
See, for example, Transparency International (2011).
19
See Cossio (2014); The Wall Street Journal (2014a).
52
See UN (2004); OECD (2014); OECD (2011a).
20
See Hoffman (2012); Railway Gazette (2012b).
53
See Breslin et al. (2010); UK Government (2010).
21
See The Democracy Center (2007).
54
See the detailed discussion, including many best practices, in World
22
See Stuttgarter-Zeitung (2013); Zeit Online (2012). Economic Forum (2013a), section 4.5.
23
See German Government (2011); Spiegel Online (2014). 55
See G20 Australia (2014).
24
See The Hindu (2013); The Telegraph India (2013). 56
See World Economic Forum (2013a), section 4.1.
25
See Tscherning (2011). 57
See Jadresic/Bertolini (2007); Jadresic (2006).
26
See Bloomberg (2014a); Bloomberg (2010); Energy Charter (2014). 58
See EBRD (2010); UN (1985); Round Table of Chief Justices (2002).
27
See KPMG (2013); TeleGeography (2013). Further international standards are: the Recommendation on the
28
See Esposito et al. (2014); World Bank (2014); World Economic Independence, Efficiency and Role of Judges (Council of Europe 1994)
Forum (2014d). and the Opinion on the Quality of Judicial Decisions (Consultative
Council of European Judges 2008).
29
See Bloomberg (2014b). 59
Data from United Nations Conference on Trade and Development
30
See Ghani et al. (2013). (UNCTAD) Investment Policy Hub (September 2014).
31
See World Economic Forum (2013a). 60
For further details, see Born (2012).
61
The box covers only the most important clauses. For a detailed
discussion, see Dolzer/Schreuer (2012).

42 Mitigation of Political & Regulatory Risk in Infrastructure Projects

62
One particular empirical challenge is endogeneity, as IIAs tend to 97
See Steffen (2012), section 5.4.
be signed between countries that already exchange a significant 98
See Festa et al. (2013); van der Woude et al. (2009); Tunnel Talk
investment flow. An extensive overview of empirical studies is presented (2007). Additional details from discussions with Dutch experts.
in Sauvant/Sachs (2009); for more recent publications, see also the
literature review in Nguyen et al. (2014). 99
See Die Welt (2001); Berliner Zeitung (2000); Fietz (1999).
63
Permanent Mission of Mexico to the WTO in Geneva (2014). 100
See Bayerische Gemeindezeitung (2012a, 2012b); E.ON (2011).
64
Several states expressed this view at the IIA conference within 101
See World Economic Forum (2014c), section 1.4 for further
the United Nations Conference on Trade and Development discussion.
(UNCTAD) World Investment Forum 2014 in Geneva on 16 102
Launched in 2014, the global Building Foundations against
October 2014. Statements can be downloaded at http://unctad- Corruption project recently highlighted the importance of these steps
worldinvestmentforum.org/programme/sessions/reforming-the- for infrastructure projects. It is a cooperative venture of the World
international-investment-agreements-regime/. Economic Forum’s Infrastructure and Urban Development Industries,
65
In addition, many of those countries are party to very few multilateral and PACI.
treaties such as FTAs. 103
See World Economic Forum (2013b).
66
See Alvarez (2010). 104
Many examples are provided in World Bank Institute (2008).
67
See UNCTAD (2012a), chapter IV. 105
See Pearl Initiative (2012, 2014); Saudi Gazette (2012).
68
See B20 Australia (2014), recommendation I&I5. 106
See Basel Institute on Governance and OECD (2013); Government
69
Examples include the China-Peru FTA (2009) and the ASEAN- of Colombia (2013).
Australia-New Zealand FTA (2009). See Potterfield (2013); UNCTAD 107
See Hasselmann (2014), ISO (2001). A predecessor of ISO 55000
(2012b); Bronfman (2006). was the publicly available specification PAS 55 Asset Management
70
See UNCITRAL (2014); Clifford Chance (2014); Johnson/Bernasconi- from the British Standards Institution (BSI), one of the most popular
Osterwalder (2014). standards. See the discussion in World Economic Forum (2014c),
section 2.2.
71
For example, CETA is the first agreement that proposes a binding
code of conduct for arbitrators (based on ethical rules of the 108
See OECD (2011b).
International Bar Association). See European Commission (2014). 109
See OECD (2007).
72
For examples, see Salacuse (2007). For a recent discussion, see MIT Sloan and The Boston Consulting
110
73
See World Economic Forum (2014b). Group (2013); for a conceptual discussion on how to include corporate
social responsibility into corporate risk management, see also Kytle/
74
See European Commission (2005b); AU/AfDB/ECA (2008); ASEAN Ruggie (2005).
(2010).
111
See Equator Principles (2014); Nguyen (2007).
75
Matsukawa/Habeck (2007) includes profiles of multilateral and
national providers, as well as a description of several transaction cases 112
See G20 Mexico (2012).
up to 2006. See also Berne Union (2014). 113
See World Economic Forum (2013a), section 2.1.
76
See MIGA (2014); World Bank (1985). 114
See World Bank (2012). For best-practice sharing between IPAs, the
77
For an overview of national providers, see Gordon (2008). World Association of Investment Promotion Agencies (WAIPA) offers
78
See MIGA (2009). study tours, training courses and conferences; see WAIPA (2012).
79
See MIGA (2014); World Bank (1985).
115
For details on how to prepare and run market soundings, see World
Bank (2009).
80 Based on discussions within the Global Strategic Infrastructure
Initiative’s Steering and Advisory Committees.
116
See Stadtler/Probst (2012).
81
See OECD (2012); MIGA (2013b, 2013c).
117
See International Hydropower Association (2014).
82
See MIGA (2007); Diario Libre (2008).
118
The Central Corridor is a highway and railway scheme connecting
Tanzania, Uganda, Rwanda, Burundi and the Democratic Republic of
83
See BMWi (2013). Congo.
84
See the discussion in the Introduction. 119
See World Economic Forum (2013c).
85
See B20 Russia (2013). 120
This report’s scope does not cover how individual companies
86
An alignment of interests between private and public stakeholders conduct risk management beyond specific projects. It is worth
might also be reached through a well-designed PPP arrangement – see mentioning, however, that companies can of course spread the risk,
section 2.1 and World Economic Forum (2013a). including political & regulatory risk, by choosing different geographies for
their projects or, in some special cases, by keeping their options open.
87
See Government of Canada (2013); Diaz (2010); Aecon (2005). For example, in a project for a liquefied natural gas plant, a floating plant
88
See, for example, Rothballer/Kaserer (2012); UBS (2011). can be built instead of one on land, such that it can be shipped away if
the political situation mandates it.
89
Based on discussions within the Global Strategic Infrastructure
Initiative’s Steering and Advisory Committees.
90
For instance, see Swiss Re/IIF (2014); Wiener (2014); Brookfield
(2012); Inderst (2010). On proposed industry standards, see also
European Financial Services Round Table (2014).
91
See The Wall Street Journal (2014b); Swiss Re (2013a, 2013b);
Hardle/Cabrera (2010).
92
See Flyvbjerg et al. (2002); Flyvbjerg (2005); and the discussion in
Box 2.
93
For case studies on the set-up of public-affairs functions in a global
organization, see Public Affairs Council (2013).
94
Examples of recent transformative changes include a massive push
towards renewable energies, increased regulation of CO2 in road-
vehicle emissions, and increased security levels in aviation after 9/11.
95
See The National (2014); IATA (2012).
96
For further discussion with respect to PPP projects, see World
Economic Forum (2013a), section 4.6. A general overview of
community engagement into planning, including examples, is provided
by IFC (2007).

Mitigation of Political & Regulatory Risk in Infrastructure Projects 43

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Mitigation of Political & Regulatory Risk in Infrastructure Projects 47

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