Public infrastructure for energy, transport, communication, utilities and social functions are in short supply in many regions worldwide. Governments are eager to mend the situation and financial markets desperate to invest. Nevertheless, progress is slow. A possible reason is a lack of properly prepared projects. If so, that would be a market failure for the development of infrastructure projects.
The combination of capital intensity, long economic life, low returns on assets and small potential for managerial value enhancement of operations calls for cheap, long-term, big-ticket financing with low investor attention, i.e. low-risk long-term debt. To provide the necessary predictability, project risks need to be meticulously allocated by a complex net of contracts. Hence, project preparation of engineering, contracts and financials require considerably higher detail for much longer periods than most projects approached by commercial companies. This poses challenges for governments, developers and financiers in terms of expertise, planning horizon and risk management.
As for the finance, hampering the development of financeable greenfield projects is the radically different risk structure during the high-risk construction and the low-risk operation phase. Construction risks generally need to be accepted by an insider, as debt providers would encounter severe moral hazard problems due to the high returns required to remunerate the risk. Consequently, the still remaining construction risk can often only be rewarded to the debt provider by expanding the term over the low-risk operation phase, which causes further complications for financial institutions, as regulation makes long terms expensive to banks, and insurance companies are generally not equipped to cope with the complex construction risk analysis and structuring.
Governments, including the European Commission’s Investment Plan for Europe as well as the European Investment Bank, have launched programs to overcome those difficulties, especially by offering partial financing, risk participation and measures to enhance market transparency. The project strives to structure possible reasons for market failures and evaluate public measures to overcome them.