The High Cost of “De-Risking” Infrastructure Finance
The World Bank recently started advising governments to assume the bulk of the risk in public-private partnerships, so as to attract more private-sector players. But in addition to introducing an unacceptable moral hazard, this guidance is creating a possible doomsday scenario for debt-saddled developing countries around the world.
OTTAWA – The World Bank and other multilateral institutions are increasingly promoting measures to “de-risk” infrastructure investments in developing countries, in order to make such projects more attractive for international finance. But “de-risking” is a misnomer: any project can be set back by external events, poor design, or mismanagement. At least some level of risk – whether stemming from human error and institutional weakness, or from earthquakes, hurricanes, and countless other sources – is inherent in all infrastructure investments.
So the question is not how to eliminate risk, but rather how to allocate it between participating parties. When the World Bank and others talk about de-risking infrastructure finance, they really mean reducing the risk for investors – and increasing the risk for governments.
The proposed risk-allocation provisions for public-private partnerships contained in the World Bank’s Guidance on PPP Contractual Provisions, 2017 Edition take this approach to a new extreme. In almost any contingency – from “force majeure” to performance failures on the part of the private party – the public party is directed to assume all or a significant part of the risk. Moreover, the Bank’s metric for determining the effectiveness of this unyielding approach is “successfully procured PPP transactions.” Missing is any measure of whether a project is actually providing the intended goods or services to citizens, and any mechanism for recourse if it is not.
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