Measuring and Mitigating Regulatory Risk in Private Infrastructure Investment

Abstract

In this article we describe steps that governments and investors can take to mitigate regulatory risk. Such risk mitigation applies a set of institutional and financial instruments to make risks and rewards commensurate with each other, promoting efficient investment. Managers and investors are concerned about risk mitigation for obvious reasons, but policy-makers share these concerns since utility infrastructure is important for economic and social development and excessive risk limits investment. In developing countries in 1990-2001, nearly 2,500 infrastructure projects involved private participation, with commitments of more than $750 billion. According to World Bank estimates, developing countries will need an additional $550 to $600 billion in infrastructure investment by 2010; however, it is unlikely that this investment need will be met because new investment (especially in energy) has declined steadily since 1997.