Mitigating risks on infrastructures

implementation in developing countries

Importance of infrastructures in development

Government all over the world need to grow their economies faster and Infrastructures are a key component to the development of a country.

Infrastructures:

Increase efficiencies

Help deliver primary services

Accelerate economic growth

Facilitate integration in the world economy

Help improve living standards

Etc.

The infrastructure paradox

There is an enormous demand in infrastructure investment yet not enough financing is

invested in infrastructure

The world could use an estimation of 6 trillion a year in infrastructure investment, yet

we only investing around 3 trillion a year in investment

On the 3 trillion, only 50 billion of capital market is invested in infrastructures

Main causes of risks in Infrastructures

investment

Unique operating environment and sectorial characteristics varying per infrastructures

Low governmental support

Little credit support

Lack of robust contract structure

Unreliable law enforcement procedures in developing countries

No exit strategy

Risk management

Definition:

Process of confronting risks, preparing for them and coping with their effects.

Risk management is increasingly a critical success factor for major infrastructure projects.

Objectives:

Produce resilience by mitigating losses and helping faster recovery

Achieve prosperity by improving benefits from pursuing opportunities

Steps to implementing risk management

strategies for infrastructure development

Risk management mainly consists of two components:

Preparation for the risk by creating platforms and control mechanisms that that will help understand the nature of the risk and implement safeguards to reduce the devastating effects of risks on infrastructures.

Effective preparation can broadly be subdivided into:

Acquiring knowledge

Obtaining protection and insurance

Coping after disaster has occurred. Despite a good preparation, the probability of a disaster occurring remains high. Developing strategies to cope after disaster has occurred is essential to build resilience and quick recovery

Knowledge/Information acquisition

Risk evaluation/ Identify where the risk lies

Acquisition of information, understanding of risk levels and risk mechanisms

Increased awareness to risk exposure

Follow trends and updates on the evolution of the situation, change of the status of the

environment

Acquisition of information about the local status and learning from successfully

implemented strategies, successful and unsuccessful experiences

Understanding the opportunity that lies behind the risk, evaluating the best course of

action

Protection

How can infrastructures be shielded the averse effects caused risks?

Protection measure? Which is the best option? Which option is available?

Insurance

Finding ways to acquire some sort of insurance to assist in recovery times

What is the best insurance to adopt based on the local environment and social

conditions?

Which type of insurance are available? Which is practically implementable?

Which insurance scheme best fit the risk and the environment?

Coping after disasters

Build capacity for resilience and quick response to disasters

Develop systems for recovery

Use of insurance

Gather information from the experience

Feedbacks from the experience to adjust future emergency measures

Strategies for preparing and coping with disaster

in an infrastructure development context Get the right information, updates and be constantly aware of the state of the

environment

Be realistic and adopt simplicity

Build foundation, without always trying to solve the problem at once

Evaluate behaviors that can increase the probability of risk

Educate every parties closely or remotely involved with the causes of the risk

Identify the right incentives to encourage parties to adopt the right attitude

Cost benefit analysis to quantitatively assess the financial aspect of risk management and foresee the future benefits

Optimal resources management in order to effectively take advantage of opportunities

Share the risk among different platform to be handled by the best parties capable of best handling the specific type of risk

Adopt coordination systems among different level of the system

Specific strategies that can be implemented

at each levels of the onion diagram

Onion diagram – World Development 2014 team

Households and communities

Community leaders should be more involved in planning of infrastructures projects. They better understand the community environment and based on their experience, can give valuable advices on how to proceed in order to avoid recurring risks

Inform he community about the opportunities that can lie in the infrastructure implementation in order to help them position themselves to benefit from those opportunities for opportunity or better understand the underlying risks and how they can affect them

Use of technology in the advantage of acquisition of information and collaboration

Build a strong social network in the community which can help increase awareness

Provide the right incentives for people to prepare for risk

Prepare for emergency plan that involve community leaders, community emergency actions; plan with the community beforehand

Develop insurance schemes that can support communities and encourage individuals to take advantage of opportunities that infrastructures development bring. Example: conditional cash transfer, provision of social insurance such as : unemployment insurance, injury insurance,

Private sector

Definition

Project finance consists of raising money in a special purpose vehicle (SPV) that has no recourse, or very limited recourse to the original sponsor of the project.

Use of project finance

When infrastructure projects go wrong, this can impede the company’s ability to : pay shareholder, pay creditors, enter into new ventures.

When there are risk in the project that the company is unaccustomed to dealing with, managing of mitigating

Companies can then use project finance to avoid exposing their balance sheet to the risk and to ensure that it does not encumber the company’s capacity to do further work.

A benefit of project finance is that a lot of debts can be put into the project, which otherwise wouldn’t be put on your balance sheet.

Project Finance

Public private partnerships programs

The private sector has to step up and do its role, but more than that the public sector has to bear hug and embrace the private sector in a way that enables the private sector to achieve risk adjusted return and many of its objectives.

Government and regulators may put their own money into projects to lower tariffs or customers charges. This help de-risk the project by combining private and public money for infrastructure development.

Vehicles through which governments can support the private sector

Capital subsidies: Government construction subsidies to reduce the private sector component

and make project financially viable once construction is complete.

Operating subsidies: Government subsidies used for the operation of the project once

construction is over.

Government guarantees: Government agrees to guarantee some of the demand on the assets

to the levels that they feel confident will be deliverable.

Public sector (State and Government)

Implement a risk board that can better work on assessing risk and implementing risk

management strategies

Each project needs to be part of a wider framework/Plan

A government unit needs to be responsible for implementation, monitoring and accountability

Need of cross-party long term political support

Need for rule of law in place

Financial sector

Need for a regulatory framework that can better support infrastructure investment and

give access to finance for bankable projects

Turn to capital markets, pension funds, insurance communities for financing

Capital markets can further help in infrastructures through project bonds, in the

environmental space through green bonds, catastrophic bonds or through innovative

thematic bonds (education, youth, employment)

Involve the diaspora to invest in local infrastructures that would make their community

live in better conditions, use incentives for foreign direct investments

Risk segmenting

Share the risk among different platforms

Segmenting risk and distributing across different platforms. Understand who is best able to manage

the individual risk, to mitigate them and allocate those risks to those parties that can best deal

with them

International community

Draw on expertise in risk management and mitigation. Gain experience from successful implemented strategies

Pooling of resources to prevent and reduce the risk for catastrophic disasters occurring

Global rules that can support risk management and facilitate global strategies at local level

Bring ODA (Official Development Assistance) into private sector funded structures as a means to leverage billions in order to bring in more investment for infrastructure development. This will supply small amount of risk capital that can catalyze multiples of capital and improve risk adjusted returns.

Conclusion

A collective action can help mitigate risks andshare the risk at each level, allowing a betterimplementation of infrastructure that willsupport development initiatives and byreflection reduce poverty, improve conditionof living and build capacity at each level tohandle different type of challenges with therisks that come with them