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Mobilising Private Investment
in Infrastructure: Investment
De-Risking and Uncertainty

2

Mobilising Private Investment
in Infrastructure: Investment
De-Risking and Uncertainty

Dejan Makovšek

International Transport Forum,
Paris

Working Group Paper
2018

The International Transport ForumThe International Transport Forum is an intergovernmental organisation with 59 member countries. It
acts as a think tank for transport policy and organises the Annual Summit of transport ministers. ITF is
the only global body that covers all transport modes. The ITF is politically autonomous andadministratively integrated with the OECD.
The ITF works for transport policies that improve peoples’ lives. Our mission is to foster a deeper
understanding of the role of transport in economic growth, environmental sustainability and social
inclusion and to raise the public profile of transport policy.
The ITF organises global dialogue for better transport. We act as a platform for discussion and prenegotiation of policy issues across all transport modes. We analyse trends, share knowledge andpromote exchange among transport decision-makers and civil society. The ITF’s Annual Summit is theworld’s largest gathering of transport ministers and the leading global platform for dialogue on transport
policy.
The Members of the Forum are: Albania, Armenia, Argentina, Australia, Austria, Azerbaijan, Belarus,
Belgium, Bosnia and Herzegovina, Bulgaria, Canada, Chile, China (People’s Republic of), Croatia, Czech
Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Ireland,Israel, Italy, Japan, Kazakhstan, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico,
Republic of Moldova, Montenegro, Morocco, the Netherlands, New Zealand, Norway, Poland, Portugal,
the Republic of North Macedonia, Romania, Russian Federation, Serbia, Slovak Republic, Slovenia, Spain,
Sweden, Switzerland, Turkey, Ukraine, the United Arab Emirates, the United Kingdom and the UnitedStates.

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Cite this work as: Makovšek (2018), “Mobilising Private Investment in Infrastructure: Investment derisking and uncertainty”, Working Group Paper, International Transport Forum, Paris.

Foreword
Transport infrastructure is a major enabler of economic development. In the drive to refurbish or build,
governments worldwide have turned to the private capital market for financing. The primary narrative
behind this push are the huge stocks of private capital that are available, while public financing
capabilities are said to be limited and insufficient.
The almost exclusive vehicle of private investment in transport infrastructure, including social
infrastructure, is Public-Private Partnerships (PPPs). In the context of PPPs, two important aspects havereceived little attention.
First, sufficient attention has not been given to the role of suppliers. The focus of governments andIntergovernmental Organisations has been on resolving the challenges to private investment from theviewpoint of investors: reducing the uncertainty they face and enabling them to price risk more
efficiently by establishing infrastructure as an asset class.
However, looking only at investors gives an incomplete view of the total cost of the risk transferred fromthe public to the private sphere. In PPPs, investors transfer some of the major risks they are not
comfortable bearing to design, construction, maintenance, and operations contractors.
Suppliers, too, face uncertainties and are unable to efficiently evaluate price risk. In such cases, the basecost of the initial investment - and of subsequent services - may be much higher than they might havebeen, and not just the cost of their financing.
Uncertainty arises from the difficulties to accurately estimate the cost of construction, maintenance,
operations, and financing. But it also stems from “unknown unknowns” (the so-called Knightian
uncertainty). For instance, changes in weather patterns or paradigmatic technological shifts, the timing
and impact of which are unclear, will influence what infrastructure is needed and where.
So what can policy makers do to reduce the cost of inefficient risk pricing of suppliers? Where does thisput PPPs? How can public decision makers reconcile long-term uncertainty with private investment ininfrastructure? Who should bear long-term uncertainty in projects: the public or the private sector?
These were some of the guiding questions for a Working Group of 33 international experts convened by
the International Transport Forum (ITF) In September 2016. The group, which assembled renowned
practitioners and academics from areas including private infrastructure finance, incentive regulation, civilengineering, project management and transport policy, examined how to address the problem of
uncertainty in contracts with a view to mobilise more private investment in transport infrastructure. As
uncertainty matters for all contracts, not only those in the context of private investment in transport
infrastructure, the Working Group’s findings are relevant for public procurement in general.
The synthesis report of the Working Group was published in June 2018. The report is complemented by aseries of 19 topical papers that provide a more in-depth analysis of the issues. A full list of the Working
Group’s research questions and outputs is available in Appendix 3.

Acknowledgements
The author is grateful to Alexander Galetovic, Fernando Mistura and Daniel Alberto Benitez forcomments on earlier versions of this paper. Iza Lejarraga deserves credit for challenging the author towrite the paper. Finally, the ITF’s colleagues, Ana Cuzovic, Cecilia Paymon and Michael Kloth were
responsible for the look and feel of this report.

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Table of contents
Executive summary ............................................................................................................................. 6
Introduction ........................................................................................................................................ 9
What investment de-risking is and why it matters ............................................................................. 10
Demonstrating the shift in the risk appetite ...................................................................................... 13
Demonstrating the scarcity of de-risking resources ........................................................................... 15
The lack of user-funded transport infrastructure............................................................................... 18
Public policy makers too faced uncertainty with regard to private investment.................................. 21
Discussion and policy implications ..................................................................................................... 22
Notes................................................................................................................................................. 25
References ........................................................................................................................................ 27
Appendix 1. Description of risk linked to infrastructure assets .......................................................... 31
Appendix 2. Private investment in transport infrastructure through project finance ......................... 34
Appendix 3. Research questions and outputs of the Working Group on Private Investment
in Infrastructure ............................................................................................................................... 35© OECD/ITF 2018

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Executive summary
What we did
Substantial efforts have been made in the past to identify barriers to private investment in infrastructure.
Data availability and quality have limited our understanding of the impact on mobilisation a particularobstacle actually has. We know, for example, that institutional stability, rule of law, corruption and otherfactors are relevant, but issues such as these take years to rectify. A policymaker, however, may find it
more practical to understand the more immediate constraints.
A recent policy puzzle has been the evolution of private investment in transport infrastructure in Europe
before and after the 2008 financial crisis. Investment contracted in the wake of the crisis, and thiscoincided with the then reduced ability of traditional lenders (i.e. banks) to support long-term
infrastructure projects. Since then the credit market for infrastructure has recovered, additional
financing channels have become available, and interest rates have remained at historical lows. The EU
provided substantial de-risking support (e.g. the European Fund for Strategic Investment) to further
offset risk and uncertainty private investors may have perceived. A major mobilisation of private
investment still did not occur.
Using limited available data, we developed a hypothesis to explain why the policy approach above
appeared ineffective. Our focus is on the seven EU countries in which more than 80% of all private
investment in transport infrastructure takes place.

What we foundProjects that are perceived as too risky compared to their expected revenues will be avoided by private
investors. Using a set of risk mitigation instruments that can be collectively described as public financial
support (i.e. investment de-risking), the state can try to offset the risk on projects. This may bring themcloser to the risk/return profile investors find acceptable.
The support ranges from softer instruments such as guarantees to outright funding support such as
grants. At the extreme end are capital grants and the state can also retain demand risk and pursue
availability-based Public Private Partnerships (PPPs).
In theory, if investors have lending capacity available and the state is willing to provide sufficient derisking support, private investment should flow. An implicit assumption here, though, is that funding is
not an issue. We have identified at least three factors that possibly inhibited such an outcome.
The government’s capacity to fund and de-risk was limited
Using different data sources we determined that in the wake of the crisis from 2009 the volume of public
investment in road and rail infrastructure dropped by about a fifth in real terms. The drop in private
investment was comparable. In absolute terms, however, the drop in public investment was an order ofmagnitude larger since projects involving private investment only represented at most 10% of total

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investment volume. Maintenance expenditures were also reduced. Overall, less money was available fortransport infrastructure.
The macroeconomic situation increased the sensitivity of investors to risk
Because of the general uncertainty during or in the aftermath of an economic crisis, one can expect anincreased sensitivity of investors to uncertainty. A highly illustrative proxy for the change in sentiments
was an almost complete loss of appetite on the part of investors to get involved in demand-based road
PPPs. The link between traffic intensity and economic cycles is well established. If economic growthprospects are uncertain, this will also impinge on traffic forecasts. In such circumstances, there was anincreased need for de-risking.
The governments faced uncertainty with regard to the public debt impact of PPPs
One of the reasons why governments pursue PPPs is to avoid recording the investment in public debt –one of the lead indicators of a country’s economic health. When the financial crisis set in the accounting
rules in the EU were reformed to allow for greater transparency. Ultimately, the treatment of PPPs
remained more or less the same, but the new rules only came into effect in 2013, with further
clarifications issued later. During this period, it is likely governments could not be sure what the expected
impact of potential PPPs could be on public debt.
User-funded proposals are likely to be very limited
The assumption that there is a large stock of user-funded projects available that only need their risk
profile reduced is unlikely to be the case. Introducing user charging was and remains a major politicalchallenge.
Our hypothesis is that the crisis increased the investors’ sensitivity to uncertainty. Where users could
fund the project, this required more de-risking, for which the governments didn’t have sufficient
resources. In addition, one of the main short-term motives (the accounting treatment) for pursuing PPPs
may have been offset. More broadly, the implicit assumption that there is a large stock of transport
infrastructure projects available that could be funded by users is questionable.

What we recommend
Investment de-risking will be ineffective when the fundamental constraint is funding and not financing
If user funding is not an option, de-risking cannot address the fact that there may simply be no money to
pay for the project.
Investment de-risking should be used in a targeted fashion to not undermine the objective of private
investment
Pursuing private investment as an objective in its own right or for accounting reasons may undermine
the objective of value for money.
De-risking should be applied without an ex ante commitment to private investment
If there is a clear public sector commitment to pursue private investment for budgetary/accounting
reasons (as opposed to value for money), then the private sector might create an excessive expectation
for public de-risking support even when it is not warranted. The only remedy is competition between
bidders. This was considered a problem area before the crisis and remains one today.

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A crisis may not be the best time to increase the mobilisation of private investment
During an economic crisis or in its aftermath private investors may express an increased sensitivity torisk. More extensive de-risking support from the government may adversely affect value for money.
A lack of data continues to inhibit understanding how de-risking might affect project performance
Our understanding how different procurement models perform, including PPPs, is limited. Consequently,
even less can be said about how de-risking and different levels of it affect project performance. Ex post
analysis and the collection of project performance data has been and remains an unfulfilled objective forgovernments.

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Introduction
Increasing private investment in infrastructure is high on the political agenda. Multiple large-scale efforts
by international organisations are underway to collect data on investment performance (risk and return
properties) and barriers to investment. Two examples are the LTI project at the OECD and the European
Commission’s investigation into investment challenges in member countries (European Commission,
2015a).1 In its Infrastructure Investment Policy Blueprint the WEF calls for “[policy] recommendations tofocus on attracting capital by undertaking thoughtful risk allocation and mitigation, enhancing
understanding of counter-party needs, enabling an efficient and transparent transaction environmentand developing a credible infrastructure pipeline” (WEF, 2014). These initiatives are important, but there
is insufficient clarity on the impact any particular obstacle actually has on mobilisation.
The absence of data on projects’ characteristics and outcomes has inhibited more evidence-based andinformed policymaking to assist in this respect. The few recent attempts to discern what factors andpolicies can positively influence private investment in (transport) infrastructure (e.g. Moszoro et al.,2014; Araya et al., 2013; Sutherland et al., 2011; Hammami et al., 2006) provide some relevant guidancefor policymakers but remain to some extent limited to generally broad recommendations on institutionalor other long-term policy issues, such as institutional capacity, stability, corruption and other general
economic conditions. From a policymaker’s perspective, however, there remains the need to understandwhat are the more immediate constraints that can influence private investments in infrastructure andhow they interact. Despite clear declarative political commitment, the mobilisation of private investment
in transport infrastructure remains a challenge for governments.
A recent policy puzzle has been the evolution of private investment in transport infrastructure in Europe
before and after the 2008 financial crisis. Investment contracted in the wake of the crisis. This coincidedwith the reduction of the private sector’s capacity to finance projects due to the overall crisis itself, theBASEL III international regulatory accord, the collapse of monoline insurance companies, etc. In the past
few years, financing has no longer been considered the defining inhibiting issue (Blundell-Wignall andRoulet, 2013), and large infrastructure projects have gained traction with other financing channels aswell (Gatti, 2014). The cost of financing PPPs, which spiked from 2010 to 2012, began returning tonormal levels as of 2013 (Revoltella et al., 2016). Nevertheless, there were no signs of private investment
recovering between 2013 and 2015.
The EU has identified a lack of a strong pipeline of projects structured in a suitable way to attract private
investors. The uncertainty related to the macroeconomic environment and regulatory stability withregards banking regulations are significant constraints on infrastructure finance.
In response to the challenges identified, the EU embarked on a path of regulatory reforms, technicalsupport in better project preparation and provided additional de-risking support through the European
Fund for Strategic Investment. Albeit some of these measures will be slow to show effect, theinvestment environment has been improving. Why then is private investment in transport infrastructure
not recovering? Do we even have a good grasp of what the trend is?
Data challenges prohibit a broad empirical investigation of what factors could best explain the puzzle
above. Instead, the strategy of this paper is to investigate the narrative around a single policy factor for
private investment mobilisation. We also focus on countries, which traditionally had a strong private
investment record, hence the argument of limited capacity to prepare well-structured projects would beless relevant.

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De-risking or risk-mitigation support is the most immediate tool available for countries wishing to crowdin private investments into infrastructure. It can take many forms, from financial guarantees toavailability payments, influencing the risk profile of the project and therefore making it more or lessattractive for the private investor or lender.
This paper advances the hypothesis that the lack of recovery in private investment in infrastructure in
the EU is the result of four factors:
Adverse economic conditions increased the sensitivity of private investors to risk, effectively requiring
more public de-risking support.
The fiscal constraints reduced the willingness and/or capacity of governments to provide de-risking
support.
Regardless of the point above, governments also pursue PPPs to avoid recording the related obligations
on the public balance-sheet. This trend would also have been hampered by government fiscal constraints
and an attempt to reform the EU’s public accounting rules around the same time.
A de-risking policy assumes there is a stock of user-funded projects waiting to be executed; this may notnecessarily be true.
To inform our discussion, we gather evidence on the trends of public and private investment in transport
infrastructure. Even a broad view of the respective shares of public and private investment in transport
infrastructure in countries which engage with private investors in Europe is still unavailable. We also
generate new indicative evidence on the change in private infrastructure investors’ risk appetite asreflected in the risk profiles of projects reaching financial closure before and after the crisis.
The term private investment in this paper refers to investment through PPPs. As determined in
Makovšek (2018), this format captures almost all private investment in transport infrastructure.
The paper is organised as follows. The second section more fully explains the meaning and importance ofinvestment de-risking. Sections three to six follow the propositions in the four bullet points above. The
last section includes a discussion of policy implications.

What investment de-risking is
and why it matters
Once a sound project proposal reaches the tendering phase, in principle all aspects/risks of the enabling
environment for investment will be reflected in the cost of financing of a particular project. Table 1
below provides an overview of risks a project might face (a description of each is provided in Annex 1).

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Table 1. Classification of risks for infrastructure projects
Risk categories

Political andregulatory

Development phase

Construction phase

Environmental review

Cancellation of permits

Rise in pre-construction
costs (longer permitting
process)

Contract renegotiation

Operation phase

Change in tariff
regulation

Termination phase

Contract duration
Decommission
Asset transfer

Currency convertibility

Change in taxation
Social acceptance
Change in regulatory or legal environment
Enforceability of contracts, collateral and security
Prefunding
Default of counterparty

Macroeconomic
and business

Refinancing risk
Liquidity
Volatility of demand/market risk

Financing availability
Inflation
Real interest rates
Exchange rate fluctuation
Governance and management of the project
Environmental

Technical

Project feasibility

Construction delays and cost
overruns

ArchaeologicalTechnology and obsolescence
Force majeure

Qualitative deficit of
the physicalstructure/ service

Termination value
different fromexpected

Source: OECD (2015).

The literature generally recommends the risks should be allocated to the party best able to bear them(OECD, 2012). Apart from the general recommendation in the literature that as the only party that canactually manage the risk the state should be responsible and bear political and regulatory risks(Yescombe, 2013; OECD, 2015; Arezki et al., 2016), it is less straightforward who should bear what shareof the macroeconomic/business or technical risks, as this would to a great extent depend on theparticular project proposal.2
When the general risk allocation is adequate and the macroeconomic environment is stable, a project
may still not be financially viable. This may be due to two cases. In the first scenario, it may be clear the
project is unable to generate sufficient revenues to recoup its costs and requires subsidies (e.g. whenproviding a public transport service to remote areas or for particular groups of users). No risk or
uncertainty exists in this calculation. In the second case, the expected revenues of the project do not
offset the expected risks. When this happens the state can provide support to reduce the project risk.3
The risks an investor faces in developed countries mainly revolve around project-specific or business risks(demand).4
Project risk can be real or perceived. This distinction stems from the fact that a risk assessment of an
infrastructure project is a structured process but cannot be a fully scientific one due to data limitations(Makovšek and Moszoro, 2018). Hence, a risk profile of an investment is known to be dependent not© OECD/ITF 201811

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only on data but also subjective perceptions. Behavioural aspects play a significant role in market
attitudes towards risk. A potentially sound project can also be perceived to be financially unviablebecause the market is not capable of recognising it as sound.
The de-risking support of the state can have multiple forms and is generally part of the contract’s
provisions with the private party. Table 2 below summarises the main elements.
Table 2. Forms of financial/project-specific risk mitigation.
Type of measure
1. Guarantees, realised directly bygovernment or by its own controlled agency
or development bank
2. Insurance (private sector)
3. Hedging (private sector)
4. Contract design, paid by contracting
authority

5. Provision of capital, realised directly bygovernment or by its own controlled agency
or development bank

6. Grants, generally delivered by contracting
authority, even if some dedicated fund at
national level may exist; tax incentives can bedelivered by national or local authorities

Instrument
1. Minimum payment, paid by contracting authority
2. Guarantee in case of default
3. Guarantee in case of refinancing
4. Exchange rate guarantees
1. Wrap insurance, technology guarantees, warranties, commercial andpolitical risk insurance
1. Derivatives contracts such as swaps, forwards, options etc.
5
1. Availability payment mechanisms
2. Offtake contracts
1. Subordinated (junior) debt
2. Debt:
2.1 at market condition
2.2 at lower interest rate
3. Equity:
3.1 at market conditions
3.2 at more advantageous conditions
1. Lump sum capital grant
2. Revenue grant:
2.1 Periodic fixed amount (mitigating the demand risk)
2.2 Revenue integration (leaving the demand risk on the private player)
3. Grant on debt interests
4. Favourable taxation schemes for SPV
5. Favourable taxation schemes for equity investors

Source: OECD (2015).

In addition to the points above, a major recommendation by the ITF Working Group on Private
Investment involves a host of measures governments can undertake to reduce contractor exposure totechnical risk (Kennedy et al., 2018). These have mainly to do with the public client investing effort increating information about project-related unknowns that each bidder would otherwise have to pursue
individually.
Assuming the contract with the state is credible, the risk profile the private investor is subject to is
ultimately derived from the contract. This means that regardless what the underlying projectcharacteristics may be the provisions of the contract ultimately determine how much risk the private
investor will take on.6 It is mainly the state that has the tools to shape the project’s risk profile, as per
Table 2. These can come in the form of contingent liabilities (guarantees), current expenditures (grants,
availability payments/contract design) or foregone revenues (tax subsidies). These tools are notnecessarily always applied only by the state directly but can take other forms as well (Box 1 provides anexample).

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Box 1. An example of a supranational risk-mitigation mechanism –the European Fund for Strategic Investment (EFSI)The support can have a national or supranational character. A substantial part of the financial support
can also come from intergovernmental organisations, such as the World Bank. In Europe, theEuropean Investment Bank (EIB) has developed a range of instruments to help de-risk projects forprivate investors in different development phases. A specific and particular example of supranational
funding is the EFSI, part of the Juncker plan.7 This major initiative in the EU is aimed at mobilising
private investment in infrastructure (among other areas). The fund gives the EIB additional riskbearing capacity (i.e. a first-loss guarantee) so it can invest in projects with a higher risk profile without
losing its triple-A rating.8 In effect, the bank could take some of the risk burden from the private sector
by taking on the riskier tranches of a project’s lending structure. The EFSI will, however, not give
grants and subsidies, i.e. it will not improve the project funding outline through providing grants.

The next sections introduce the relevance of the four arguments, which constitute our hypothesis why
an investment de-risking policy in the EU in recent years has had limited effectiveness in mobilising
private investment.

Demonstrating the shift in the risk appetite
It is well established that even when investment is only partially irreversible (i.e. the cost of theinvestment can only be partially recouped and is not sunk) firms invest more cautiously in periods ofincreased uncertainty (Caballero and Pindyck, 1996; Bloom, Bond and Van Reenen, 2007; Bachman,
Elstner and Sims, 2013).9 A firm’s response to uncertainty is wait-and-see. In other words, firms hold off
on projects until their perceived risk profile becomes acceptable.
In our case quantitative analysis, we would ideally use information on the types and extent ofgovernment support at a project level while controlling for the political/regulatory and macroeconomic
environment. Data on the flow of private investment would need to be available to estimate how thevariations in public financial support affect the mobilisation of private investment across countries.
Furthermore, we would need to have an overview of what share of transport investment propositions bygovernments was expected to be funded by users. Most of these inputs are unavailable. In the absenceof the relevant data, we limit our efforts to a search for signs of increased risk aversion on the part ofinvestors in transport infrastructure.
One indirect sign was the movement of credit spreads for PPP debt finance over Libor/Euribor. The
financial crisis tripled the spreads from 80 in 2007 to 250 basis points in 2010. The growth continued
until 2012, with a decline starting in 2013 (Revoltella et al., 2016). The fact lending was constrained by
the collapse of monoline insurance companies in 2008 and additional bank regulations regarding their
exposure to risk, however, adds to the generally uncertain macroeconomic prospects.

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Of the many types of de-risking support available (Table 2) data on contract design is the mostaccessible. Contract design is the most straightforward form of public financial support because in theavailability-based contract the state retains the demand risk and pays for the availability of theinfrastructure. This seriously reduces private investors’ risk exposure and the financing cost of the
project. In short, contract design is (also) a proxy for investors’ risk appetite and may imply increased risk
aversion beyond demand risk. Nevertheless, it likely suffers from the same confounding problem aslooking at credit spreads alone does.
With the assistance of parallel work in the BENEFIT4Transport10 EU research project, we were able todetermine the demand/availability-based contract split for road projects. Insufficient information wasavailable for railway projects.11 Figure 1 represents the shift in the type of contract, suggesting that
potentially the appetite of the private sector to accept demand risk has gone down. Though the current
example refers to a particular sector and a particular risk, demand risk is linked to macroeconomic
conditions and thus may be reflective of broader risk attitudes of private investors.12

Figure 1. The distribution of demand-based vs. availability-based contracts
in private investment in roads, 1995 – 2014, EU
Demand Based

Availability Based

No. of projects

100%

20

90%

18

80%

16

70%

14

60%

12

50%

10

40%

8

30%

6

20%

4

10%

2

0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0

Source: DEALOGIC database; BENEFIT4Transport project data.

A more detailed analysis of road projects in the DEALOGIC database within the BENEFIT project revealed
more precisely that the shift does not come directly from the change of preference within the countries.
The shift appears to be the result of new entrants in the PPP market relying on availability-based
contracts and older mature economies, which have traditionally relied on demand-based contracts(e.g. Spain), reducing their activity in demand-based projects.13 Nevertheless, compared to pastdevelopment, the general disposition appears to reflect a change in risk appetites of the private sector.14
Lastly, as will be evident from the next section, the upswing in the number of projects in 2014 does notreally signal an increased mobilisation of private investment. The value of projects with private
investment was more or less stagnant or declining after 2010. Accordingly, there may have been more
projects, but they were smaller in size.

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Demonstrating the scarcity of de-risking resources
This section aims to demonstrate the reduced capacity of governments to fund and provide de-risking
support to private investment in transport infrastructure.
Proposing that governments face fiscal constraints during an economic crisis seems self-evident, but it is
not necessarily sufficient to claim the constraints have equally affected all sectors.
Hence, our objective here is simply to demonstrate that the total amount of investment in transport
infrastructure has decreased substantially and that the reduction was not offset by private investment,
which incidentally was arguably supported through de-risking, suggesting the presence and effectivenessof such a policy.
As stressed in the previous section, data on the details of de-risking support in a particular sector isunavailable. The same is true for a seemingly basic measure of comparing resources governments invest
in transport infrastructure compared to the contribution of private investment. How can we thendetermine that governments had less money to spend on transport infrastructure if we don’t know whatpart is public and what private?15
Given the available data sources, our demonstration has to proceed in an indirect fashion. The OECD/ITF
collects data on the total investment in public and private transport infrastructure. Using a separate
source of data on private investment in infrastructure from Mistura (2018), we combine the two toreceive an order of magnitude of the trends of public and private investment. Because the data on ports
and airports is particularly sketchy, we focus on the road and rail sector only. We begin by treating
private investment through PPPs first.
The project finance market in Europe has been traditionally the largest in the World (IJGlobal, 2015). Thisis true for the transport sector as well (Mistura, forthcoming). From 1995-2015, the 22 European OECD
countries represented almost 40% of the total global private investment in transport through project
finance. Transport infrastructure projects tend to be large relative to the other sectors and also
represent the majority of the value invested. In 2014, in terms of the share of transactions in the EU,
transport represented 28% of the total (23 out of 82), while in terms of the value, transport accounted
for 63% of total project finance investment in Europe (EUR 11.8 billion out of EUR 18.7 billion)(EPEC, 2015a).
Not all countries in Europe have pursued private investment in infrastructure (and operations) throughproject finance. Figure 2 shows that of the 22 countries observed, nine account for 90% of all private
investment, UK being the largest with a 25% share. According to the database, there were no project
finance PPPs in Slovenia and Estonia. As shown in Annex 2, the country ranking does not substantiallychange over the first or second decade of the observed period. Apart from one exception in the second
decade, all countries continue to represent the majority of private investment. In further analysis, due tolack of other complementary data we only address seven countries, hereinafter referred to as OECD7
countries (the United Kingdom, Spain, Portugal, France, Turkey, Italy and Germany). These represent
more than 80% of all project finance volume in transport in Europe. It should be noted that these private
investment numbers cannot necessarily be considered as highly precise, but they should be accurateenough to determine the broad trend and the order of magnitude between private and public
investment.

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Figure 2. Cumulative private investment in transport infrastructure per
European OECD country and mode, 1995-2016, millions of USD
Airports

Ports

Railroads

Roads

Current millions of USD

80 00070 00060 00050 00040 00030 000
20 000
10 0000

Source: Dealogic Projectware database.

With the newly available data above and OECD/ITF transport investment statistics, a first insight ispossible into the share of private funds in total investment and trends on a subsector level (Figure 3).

Figure 3. Private and total investment in road and rail infrastructure in OECD7*countries, 1995-2015, millions of USD, 2005 prices
Private investment in rail and road in infrastructure
120 000

Total investment in rail and road infrastructure2005 prices, millions of USD

100 000
80 00060 00040 000
20 00001995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

* Due to incomplete data on total investment, Greece was excluded from this overview.
Source: Dealogic Projectware database, OECD/ITF statistics.

Comparisons between total public and private investments are subject to an important caveat. There is afundamental difference between the DEALOGIC project finance database and OECD/ITF data, which

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follow national accounts principles. The project finance database pertains to total project values at thefinancial close of the year the project was secured, while the OECD/ITF data reflects the current
expenditures per year and, consequently, the pace of construction progress and expenditures. In effect,
the project finance database reflects expenditures that would need to be spread out over several years
and hence would affect total infrastructure investment with a lag.
To assist in the interpretation of the two streams of data, Figure 4 provides an illustration of theconstruction pace, the assumption being each project finance deal took three years to construct. If thatis the case, the red line denotes how expenditures would be recorded in the OECD/ITF (or SNA) data on
investment in infrastructure. Figure 3 also more readily reveals the trend of private investment in realterms. If we omit a major railway project in the UK in 1998 (the Channel Tunnel Rail Link, also known asHS1), private investment in the European OECD countries in road and rail infrastructure could be
described as growing until 2010.
Taking the clarifications above into account, a sharp drop in both public and private investment isevident, though public investment started falling much earlier. Figure 3 also establishes the comparative
size of total public and private investment in the OECD7 countries. Given the DEALOGIC database has notbeen vetted, the relationship has to be treated with caution, though it may adequately reflect the orderof magnitude between total and private investment, and the trend. Projects involving private investment
represent at best about 10% of total investment, public investment representing the rest.
Figure 4. Private investment in road and rail infrastructure in OECD7 countries,
contract value vs. construction pace, 1995-2014, millions of USD, 2005 prices
Private investment in road and rail infrastructure (contract value)
Private investment in road and rail infrastructure (3y construction pace)
18 0002005 prices, millions of USD

16 000
14 000Channel tunnel rail link

12 000
10 000
8 000
6 000
4 000
2 000
0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Dealogic Projectware database.

An additional indicator of resource constraints for transport infrastructure is evident from roadmaintenance expenditures. Despite public investment growth declining – but not ceasing – maintenanceexpenditures fell disproportionally. The reduction of investment growth in Figure 3 implies theinfrastructure stock grew at a slower pace. From a technical perspective, maintenance should follow thegrowth of the stock of infrastructure. Maintenance expenditure trends in Figure 5 for state-owned
entities only suggest that governments deferred maintenance activity due to constrained budgets. Dataon private maintenance dynamics was not available.

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Figure 5. Road maintenance trends in selected countries, 2005-2014 (2005=100).

Maintenance expenditure trend for EU-18

Maintenance expenditures in UK, FR, IT

130Median of annual indices

120
110
100
90
80
70
60
50

2005

2006

2007

2008

2009

2010

2011

2012

2013

Note: Data was only available for three of the OECD7 countries. Available data for other countries (Austria,
Belgium, Croatia, the Czech Republic, Denmark, Spain, Finland, Iceland, Ireland, Italy, Lithuania, Liechtenstein,
Luxembourg, Norway, Poland, Slovakia, Slovenia and Sweden) was included to illustrate the trend is not particular
to the UK, Italy and France.
Source: OECD/ITF statistics.

In summary, less money was available for public transport infrastructure investment. Judging from thestagnant and small private investment share, significant public funding also did not flow into private
investment, which would have been almost exclusively availability-based PPPs.
If potential user-funded projects were waiting to be financed, the governments would still have arelatively strong motive to prefer the private investment option. This would be related to the public debt
accounting framework in the EU, which allows them to procure infrastructure through PPPs, without
recording the related obligations on the public balance sheets or in the public debt. Both of theseassumptions, though, were less clear-cut than the two we have presented so far.

The lack of user-funded transport infrastructure
Transport infrastructure can be funded from dedicated taxes (e.g. fuel or vehicle registration taxes), user
charges (e.g. tolls) and other commercial revenues (e.g. revenue from renting commercial space).
Many transport infrastructure systems cannot fully recover their cost. This can be because there is aninsufficient number of users and their willingness to pay is too low or because user charging is strongly
politically opposed. In these cases, the funding needs to come from the general government budget,competing with other expenditure needs.

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We provide a brief snapshot of the road and rail sector, which represent the biggest part of the private
investment trend showcased in the past 20 years. Port and airport investments are generally few and far
in between and therefore not part of our analysis.
In the EU road sector, few countries have introduced user charging on their full motorway network(Table 3). On average only 55% of the motorway network is tolled. The motorway system generally
represents only a smaller portion of a national road network (in France, for example, the motorways
represent about 10% of the national road network).16 While some countries also extend user charging toparts of the remaining network for heavy goods vehicles only, a significant participation of public budgets(state, regional or local) is generally required. Figure 5, which shows maintenance expendituredependence on economic cycles, seems to confirm this.
A study for the European Commission also noted that most member states do not recover full
infrastructure costs from road charging due to a lack of methods to relate charges to costs or charges
being set by political decisions. Germany, and Austria to some extent, were the only two countries thatare currently reflecting charges to recover investment and operating costs across the national motorway
network (European Commission, 2014).

Table 3. Share of tolled motorways in total motorway network
Full members

Tolled network length [km]Tolled network/ total national motorway network (%)

Austria

2 177

100

Croatia

1 289

100

Denmark

34

3

France9 048

78

Greece1 659

87

Hungary

1 145

74

Ireland

337

37

Italy

5 814

86

The Netherlands

20

1

Norway911

NA

Poland468

34

Portugal

2 943

98

Serbia603

100

Slovenia
Spain
United Kingdom
Total

607
3 404
42
30 50179
23
155

Source: PWC (2014).

Historically, one of the major obstacles to a wider introduction of user charging on road networks wastechnology. With the advent of satellite-based charging, which avoids the need for toll stations or
portals, the potential cost of the system per user has been reduced. The obstacles to user charging areless and less those of technology but rather of political transition.

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In the UK, for example, the experts have supported the introduction of user charging on motorways foryears (Eddington, 2006), but this has remained a challenging objective, which despite repeated attempts
by different governments has not yet materialised. Another example was the attempt to introduce heavy
goods vehicle charging (the “ecotaxe” initiative) on 15 000 km of national roads in France in addition to
the motorway. The initiative was abandoned in 2014 after heavy conflicts with protesters when the
tolling gantries were erected. The compensation to the private partner responsible for the installation of
the system exceeded EUR 1 billion (Cour des Comptes, 2017).
According to Casullo (2017), the situation of railway infrastructure with regard to funding in Europe is noless challenging. Most railway systems in Europe have difficulties achieving full cost recovery, withsubsidies on average achieving 31 % (Figure 6).
According to Dehornoy (2015), with the exception of airport links, the availability-based PPP model has
been the exclusive form of private investment in railways post 2000.
A somewhat anecdotal piece of additional evidence was the repeated lamentation of the investmentcommunity on the insufficient supply of bankable projects (OECD and Euromoney, 2015), i.e. lessexperienced governments kept proposing projects without a full realisation private investment equals
private financing and the money invested must be recovered.
Figure 6. Rail industry costs and income in the EU28 in 2012(billions of EUR, 2010 prices, excluding off-balance sheet items)
120

Other 10.7
100

80

Operator cost
75.7

60

Subsidy
35
Freight revenue
20

40

20

0

IM cost36.4
Costs

Passenger revenue
46.4

IncomeSource: European Commission (2015b).

Overall, despite the unavailability of a detailed overview with regard to road and rail infrastructure
funding in Europe, a suggestion there may be a significant stock of transport infrastructure of potentiallyuser-funded infrastructure appears not to have much support. An order of magnitude leap in thevolumes of investment in transport infrastructure may therefore simply not be possible. The basic reason
is that most infrastructure depends at least in part on government funding. Where user charging onroads was politically acceptable, its introduction over the past 20 years has been a slow process andmainly affected the motorway networks. In some cases, it remains a difficult political challenge. For
railway infrastructure, a strong dependence on public budgets has been characteristic.

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Public policy makers too faced uncertainty withregard to private investment
Proposing that private investment has not recovered due to lack of public de-risking support may appear
counterintuitive due to perverse incentives in the national accounting for public debt in the EU andelsewhere. It is well established that members of the EU are subject to the ESA 2010 public debt
accounting principles, which allow them to classify availability-based PPPs off the public balance sheet. In
simplified terms, the governments may borrow through the PPP to procure infrastructure improvements,
without recording those liabilities in public debt. In effect, countries can temporarily and virtually extend
their borrowing constraints. This incentive is particularly tempting for EU countries, which are subject to
Maastricht criteria that limit them to keeping public debt at a maximum of 60% of GDP. In essence, thecountries promote private investment in infrastructure, pay for it, all the while not recording these
expenditures in public debt.

Box 1. PPP accounting treatment and the newEuropean System of Accounts (ESA) 2010 accounting framework
Due to the change in accounting standards in both the public and private sectors, it has been
considered in the past whether the EUROSTAT should adjust its rules to promote greatertransparency. One possibility was to harmonise accounting and statistical treatments, whereby the
EUROSTAT would move to a control test for statistical treatment of PPPs. Under the control criterion,
the economic ownership of an asset lies with the party that 1) controls what services the nongovernment partner must provide and 2) has control over the residual value of the asset in case ofearly termination of the PPP contract. Under the risk and reward criterion, the economic ownership ofan asset lies with the party that possesses the asset and carries the risks, benefits and burden inconnection with the asset.
As the European PPP Expertise Centre (EPEC) wrote in 2010, “should Eurostat change its rules infavour of a control approach, the solution will almost certainly require modification to the excessive
deficit procedure if worthwhile PPPs are not to be lost. A carve-out from the application of theexcessive deficit procedure (EDP) for long-term infrastructure investment is one option, albeit one
that could be both politically controversial and complex to implement.” In short, a change to thecontrol approach would push a great majority of PPPs onto the balance sheet of the governments.
Ultimately, the ESA2010 still relies on the risk and reward criterion but focuses more strictly on how
government financing, government guarantees (e.g. debt, demand, revenue), contract termination
provisions and revenue streams from the asset are affecting the risk/reward balance. The exact
interpretation of this however was not yet fully settled, and a further revision of the standard was
expected in 2016 (EPEC, 2015b).
Note: EUROSTAT’s definition of PPPs would be aligned with an availability-based project as described in thisreport. Projects which recover their cost through users are treated as concessions.

The concern with regard to accounting treatment is countries will pursue PPPs for budgetary instead ofvalue for money reasons. This motive has been widely dismissed, and the OECD in its 2012 PPP principles
recommends grounding the choice for PPPs in value for money. If the incentive of keeping debt off the© OECD/ITF 201821

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books had prevailed, we could expect private investment to start increasing towards the end of theperiod our data cover (when financing was no longer considered an issue), contrary to the trend
recorded.
A potential explanation for the absence of the accounting treatment influence may be that a change inthe EUROSTAT accounting rules had been considered for some time and was introduced in 2013 (the ESA2010 rules). In the process and after, uncertainty was introduced with regard to potential accounting
treatment of PPPs (see Box 1) for national decision makers (not private investors directly).
There is insufficient data available, and it is well beyond the scope of this paper to analyse the details of
why the accounting treatment motive did not prevail. It may be that the regulatory uncertainty as towhether governments will be able to treat new PPP projects as off the balance sheet has compressed the
project pipeline to those where the governments truly is certain they represent better value for money
than public investment.
The EU provided the member states with an additional de-risking tool – the EFSI, which started operatingin 2015.17 It provides a way out for the countries with respect to the projects’ accounting treatment. The
support provided by the EIB does not affect the accounting treatment of a particular project, and thegovernment’s contributions to the EFSI are treated as off the balance sheet as well. 18 The distinct featureof this mechanism though is that the appropriateness of the project for such support will be determinedthrough an established approval process at the EIB and not at the country level.19
It should be noted that user-funded PPPs would in principle also be exposed to this type of rule change
since under the control approach the project-related liabilities (albeit in the form of unearned revenues
due to a transfer of the right to collect them) would need to be accounted for on the public balance
sheet.

Discussion and policy implications
In the context of this paper, the policy makers attempted to mobilise more private investment intotransport infrastructure through resolving what they thought was a financing problem. The general lackof relevant data did not make their job easy.
The private investment trend stagnated after the onset of the global financial crisis and its aftermath.
One could argue that the de-risking prevented, or could have prevented, a further decline in private
investment. If the objective was, however, to increase the volume of total investment in infrastructure
substantially, then the policy fell far short of its objective.
Private sector transport infrastructure investment does not occur by itself in a competitive market.
Investment opportunities are provided by the state, which does the planning and project selection. If theprivate sector did not face financing constraints then a natural conclusion would be either one of thefollowing:
The state did not provide project opportunities because it could not fund them.

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The risk profile of the projects was unacceptable to the private investors because the project proposals
were bad or because the state was unable or unwilling to provide sufficient de-risking support.
Our hypothesis was that there are four reasons why the de-risking approach would be ineffective thatcovers both outcomes above:
The economic crisis led to a heightened sensitivity to macroeconomic and business risk and, ultimately,
uncertainty. Consequently, the private investors required more de-risking support.
The capacity of the state to provide the support was limited. We can’t say to what extent this was true
for contingent liabilities (e.g. guarantees). With regard to any kind of funding support, the data do showmuch less money was available for transport infrastructure investment and maintenance.
The state may have been unwilling to provide support because it was uncertain whether it would bepossible to treat them off the balance sheet.
The implicit assumption that there is a stock of potentially user-funded projects available was unlikely tohave been met.
If the hypothesis is sound, then additional de-risking assistance such as EFSI will have a limited impact for
infrastructure facing funding constraints.20 It will reinforce the incentive to pursue government-funded
PPPs without their respective liabilities being recorded on the government balance sheet. As alreadymentioned, EFSI could therefore be considered a bypass to the self-imposed Maastricht criteria in theEU, which limit governments’ debt and budget deficit flexibility to 60% and 3% respectively.
In short, private investment does not generate new funding. It also does not extend the real government
borrowing (i.e. financing) constraint, though it may create the appearance through self-imposed
restrictions and the solutions to bypass them. This is explained in greater detail in other work of the ITF
Working Group on Private Investment in Transport Infrastructure (Funke, Irwin and Rial, 2013;
Makovšek, 2018). A sustainable approach to private investment is to pursue it on the merits of increased
efficiency.
Pursuing private investment on the merit of the project’s accounting treatment is risky both in the senseof reduced transparency of governments’ obligations and because it could adversely impact project
selection. Perhaps an added comfort of EFSI in that sense is that its involvement in a project also implies
a project soundness check by the EIB. However, a clear primary objective of the Juncker plan was tomobilise private investment into infrastructure.
Even if project selection issues can be reduced, an equally relevant concern is the potential impact of derisking on efficiency incentives in projects. Value for money in private investment should not be taken for
granted.
A reduction of the risk burden of the private investor can be beneficial when it affects risks they can’t
manage and should not bear anyway.21 It may however, negatively affect the efficiency incentives if derisking inadequately/excessively affects the risks that come from insufficient monitoring/control of
suppliers. In the context of an infrastructure project, there is no research and data whatsoever available
investigating how risk more or less affects project outcomes on a systematic level. How de-risking
measures exactly affect value for money in infrastructure projects is not at all well understood given thateven the basic ex post performance data are not available, such as the impact of different contract types
on project end-cost (e.g. see Kennedy et al., 2018; Makovšek and Moszoro, 2018).
A related but additional moral hazard is that public de-risking support might stimulate strategic
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investment for budgetary reasons – as opposed to value for money – might create an excessive
expectation of public de-risking support even when it is not warranted. The only remedy is competition
among bidders. Studies made before the crisis revealed competition as a problem area, with the average
number of bidders only around two or three (Makovšek and Moszoro (2018) include a review of PPP
competition studies). Roumboutsos (forthcoming) demonstrates in the case of the EU that the area ofmajor transport infrastructure procurement in general is dominated by an oligopoly of about eightcompanies.
In summary, promoting investment is an accepted mechanism of anti-cyclical economic policy. It is also
accepted that the private sector has an increased sensitivity to risk during and in the wake of a crisis. A
de-risking approach may help overcome some of the uncertainty aversion, however we don’t know how
such a policy will affect project outcomes. If private investment should be pursued on the merit of
improved efficiency, is a crisis the right time to pursue a private investment mobilisation in the firstplace?
Given the issues with data reported in our analysis and gaps in data that could inform a more completequantitative analysis, our conclusions have to be seen as tentative. They may serve to inform future
research in better understanding the interactions between the behaviour of investors and governments
in different macroeconomic conditions.

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Notes

1 See http://www.oecd.org/finance/private-pensions/institutionalinvestorsandlong-terminvestment.htm.
2 Makovšek (2018) provides an overview of the rationale for demand risk transfer in different contexts.
3 In developing countries, subject to substantial social and/or political instability even public support might be insufficient. In these cases
projects might be supported by specific guarantees by international organisation, such as MIGA by the World Bank.
4 An example where the private sector was not fully able to absorb the construction risk could be the recent Thames Tideway Tunnel projectthat is in development. The purpose of the tunnel was to prevent discharge of excess sewer water from London in the Thames river. But at the
projected cost of GBP 4.2 billion, the risk involved in the tunnelling was prohibitive for a full risk transfer, and government guarantees were used
to make the project viable (Zhivov, 2018).
5 There is also an alternative to address the demand risk apart from availability based structures. Demand risk could also be offset by least
present value concessions (Engel et al., 2014), which are represented (e.g Saussier, 2013) but are not considered to be common in Europe(Albalate, 2014; Beria, Ramella and Laurino, 2015).
6 Issues around credible commitment to the contract substantially complicate the investor environment and can also undermine the purpose ofcompetition for the contract (i.e. achieving better value for money). Multiple experiences around the world in this regard were treated in aninternational expert roundtable on PPP renegotiations by the ITF in 2017.
7 According to some, the EFSI can also be used to help mitigate country risk (http://europa.eu/rapid/press-release_MEMO-15-3223_en.htm).
8 The creation of this mechanism was one of the reasons why Standard & Poor’s decided to change the rating outlook for the EU (supranational)
from AA+/stable to AA+/negative (there is a greater than one-in-three chance its rating will be reduced over the next two years).
9 Irreversible investments are those which have little or no value unless used in production. Investments in transport infrastructure areconsidered irreversible. If a road is built and nobody uses it, very little value if any could be recovered. The only residual value would be the land,
but the road would need to be removed first.
10 The BENEFIT4Transport project is an EU-funded research consortium of multiple universities in Europe. It focuses on identifying value
propositions which make PPP projects in transport financially viable (www.benefit4transport.eu).
11 With the exception of railway links to major airports, railway projects in Europe will in general be subject to availability payments or otherforms of public financial support. These are preconditioned with the nature of railway sector in Europe where the infrastructure manager may
not be able to recover the cost of infrastructure through user charges alone (Thompson, 2008). In addition, Dehornoy (2015), who assembled
data on most EU PPP railway projects by 2011, reports that railway projects in general started preferring availability schemes after 2000.
12 It is broadly accepted that at least as far freight transportation is concerned there is a strong link to economic activity, i.e. GDP (see, forinstance, Kveiborg and Fosgerau, 2007; Marazzo et al., 2010; Tapio, 2005).
13 The choice of an availability scheme in countries may depend on other factors as well.
14 One might also argue that the market responded to the evidence on systematic errors in traffic forecasting (Flyvbjerg, Holm and Buhl, 2002;
Standard & Poor’s, 2005; Bain, 2009). The first studies were, however, available years before the actual change in demand risk appetite wasrecorded, which appears to coincide with the emergence of the global financial crisis.
15 Data on public investment into specific infrastructure subsectors cannot be easily distilled from gross fixed capital formation accounts (seeMistura, forthcoming).
16 See https://www.loc.gov/law/help/infrastructure-funding/france.php.
17 According to when the first projects received support, listed on http://www.eib.org/efsi/efsi-projects/index.htm.
18 The EIB is treated as a non-government entity (email from Eurostat, dated 19 February 2016).

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19 This could potentially be seen as an improvement to project selection practices in some EU countries, but it does not guarantee that projects
which score badly in a cost-benefit assessment will not be pursued anyway.
20 Given the temporal distance from the financial crisis, when EFSI started operating it was difficult to ascertain what exactly would thecontribution of this programme be and how much any change in investment mobilisation would be due to the recovering macroeconomic
conditions and concomitant improving government budgets and private risk appetites.
21 For the same unit of risk/uncertainty, the ultimate cost of financing is higher for the private sector than the public one. Thus risks than can’t
be managed should not be transferred to the private sector as no efficiency gains can be made, and only a higher cost will be incurred.
Makovšek and Moszoro (2018) provide a more detailed discussion on the relative cost of public and private finance in the case of project finance
PPPs.

26

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Appendix 1. Description of risk linked toinfrastructure assets
Political and regulatory risks
Procurement of permits (land, construction, environmental): Obtaining the necessary land, construction
or environmental permits might prove costlier or take longer than expected, thus increasing costs.
Cancellation of permits: The risk of a public authority cancelling the necessary permits.
Contract renegotiation: The risk of a public authority forcing renegotiation of contracts, thereby changing
the financial arrangements of the original project.
Change in tariff regulation: The risk of a price change in regulated markets due to a political decision.
Contract duration: The length of the contact is appropriately matched to the length of the useful lifespanof the asset.
Decommission: Risk related to the disposal of the asset at the end of the contract agreement or theuseful life of the asset. This risk is especially related to large assets that may generate toxic wastes orenvironmental risks that need to be cleaned up before the asset may be retired.
Asset transfer: The feasibility and cost of transfer of the asset at the end of the contract agreement.
The risk that an asset could become “stranded” due to changing government regulation or policy.
Enforceability of contracts, collateral and security: This risk is closely related to the legal environmentthat is associated with infrastructure finance such as PPP frameworks and the enforceability of leases,
concessions and other contracted payment schemes.
Changes in the wider regulatory or legal environment: Any modification of the regulatory or legal
environment can have widespread consequences on affected companies. This risk can be differentiatedthrough the range of affected entities. A general change in law applies to all businesses in the country, aspecific change in law to a defined industry, and a discriminatory change in law singles out one company.
The ability to cope with or even anticipate such changes can be important for the continued economic
viability of a project.
Changes in taxation: Changes in taxation of company or project revenues, output delivered by the
project, financial transactions or any other element of the project structure, including taxation levied oninvestors themselves. Changes might be categorised similarly to changes in the regulatory or legal
environment.
Currency convertibility: Sufficient amounts of requested foreign currencies are available at the timeneeded to repay foreign debt or repatriate dividends and principal. This risk generally does not apply todeveloped economies with stable and developed foreign-exchange markets.
Social acceptance: This risk applies specifically to large-scale public infrastructure projects and is when
the general population does not support the project. Consequences can impact all phases of the project.
Protest might lead to a delay in construction or hamper proper operation, leading to a loss of revenue;
official bodies supporting the project might come under pressure from public opinion translating into
political action.

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Macroeconomic and business risks
Default of counterparty: Default of any party involved in the project agreement, including government,
suppliers, lenders and insurers.
Availability of prefunding: The availability of funds to perform viability and feasibility studies. Prefunding
is a sunk cost, thus making it difficult to raise money from private sources before commercial viability canbe established.
Exchange rate fluctuation: If liabilities and revenues are in different currencies from one another, project
participants can be exposed to exchange rate risk due to the volatility of exchange rates over time.
Liquidity risk: The risk that assets won’t generate enough cash flow to service debt payments and anyother obligation. Also, the risk associated with pricing assets where market prices are not observable.
Refinancing risk: If a project is initially financed via agreements with shorter duration than the project life
itself, there is a risk of an inability to refinance loans at maturity due to performance issues orunfavourable market conditions (liquidity, interest rates).
Inflation risk: The risk that aggregate prices increase in an economy and the asset is exposed to rising
prices in a detrimental manner. The risk that the replacement cost of the asset increases over time.
Interest rates tend to be correlated with inflation, thus inflation risk can be thought of as interest raterisk.
Real interest rate risk: A component of nominal interest rates, an increase in real interest rates translates
to an increase in the real cost of finance, which can strongly affect profitability.
Volatility of demand/revenue risk: The risk that the project company might fail to generate sufficientdemand (usage of facilities or service) at the projected price of usage, ultimately leading to a lower levelof revenue than projected. Profitability can also be affected by an unforeseen increase in costs.

Technical risksArchaeological: Additional costs might arise if archaeological discoveries (e.g. historical sites, fossils, etc.)
are discovered on the land intended for construction.
Obsolescence: The technology might become outdated and lose its economic appeal or become thesubject of constraining regulation rendering it uncompetitive in the market. This is true for establishedtechnologies but is also applicable to new technologies where unintended consequences might lead tohigher costs or removal from the market.
Technology risk: A (new) technology might not perform as projected or have unforeseen consequences,for example, on the environment. Lenders are more reluctant to lend against a project using novel
technologies due to a lack of performance benchmarks and increased uncertainty of risks. Yescombe(2013) notes that project finance is more suitable for projects using established technologies.
Governance and management of the project: Failure to deliver and operate the project to the standards
agreed due to poor management or poor risk control procedures.

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Reliability of forecasts for construction costs and delivery time: The risk the construction authority fails todeliver the project on time and on budget. The reasons can be due to a performance deficit of theconstruction contractor, unexpected events leading to a longer construction period or the failure of third
parties to provide auxiliary services necessary for operation. The consequences could be a rise infinancing costs, including interest payments during a prolonged construction period, loss or deference of
project revenue, as well as financial penalties payable to the contracting authority. A delay inconstruction, therefore, very often leads to the need for additional funding, the responsibilities for whichshould be allocated in the contract signed between the relevant parties.
Qualitative deficit of physical structure/service: The risk that the project might not deliver the agreed
output at agreed conditions.
Force majeure: Risk of forces outside the control of any project participant and affecting the properdelivery, operation and termination of the project. This includes direct (physical damage) and economic(loss of revenue) consequences from natural disasters, as well as economic and political developments
such as strikes and armed conflicts. Force Majeure events might be defined in insurance or risk-transfer
agreements.
Environmental risk: A project’s impact on the environment does not only have significant financial
implications but is also an increasingly important factor for potential investors operating under ESG
guidelines. The direct quantifiable impact on the environment, such as the production of waste andcarbon emissions, may be reflected in the form of permits or additional taxes, thus creating a cost factor
which needs to be estimated and managed. Indirect risks stemming from a project’s impact on theenvironment include public opposition to construction or operation, as well as negative image effects for
involved sponsors or lenders. Legislation and regulation defining environmental requirements andstandards might substantially change, in extremis rendering a technology obsolete. New technologies
might have unintended negative consequences on the environment, exposing projects to a possible
surge in costs and endangering the business model. Since infrastructure assets are built for long
operation phases, this risk is especially relevant for them. An environmental impact assessment might
help quantifying the exposure to environmental risk and establish compliance with current laws, but it
does not protect from unforeseen events. On the financing side, environmental factors become
increasingly important to potential investors, illustrated by the spread of guidelines and principles they
are adhering to.
Termination value: Since infrastructure assets are long-lived, any issues with forecasting, particularly
related to salvage values and depreciation of assets over time, can affect the expected termination valueof an investment. For PPP contracts where the terminal value is zero, this is less of an issue. This risk can
be greater for owners of direct equity, such as corporations or direct equity sponsors.
Source: OECD (2015).

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Appendix 2. Private investment in transport
infrastructure through project finance
Investment in
1995-2014(total project value,
Million USD)Country rank

57 19039 32626 10922 38416 64915 21213 513
9 706
7 310
5 605
4 468
3 866
3 777
1 690
1 664
998
963
957
672
221
0
0

United Kingdom
Spain
Portugal
FranceTurkeyItaly
GreeceGermany
Netherlands
Belgium
Ireland
Hungary
PolandAustria
Slovak RepublicCzech Republic
NorwayFinlandSwedenDenmark
Slovenia
Estonia

Investment in
1995-2004(Million USD)
27 080
9 919
8 776
2 979
1 518
1 441
1 310
1 255
1 184
1 165
930
772
672
590
412
346
109
0
0
0
0
0

Country rank
United Kingdom
Portugal
Spain
GreeceNetherlands
Germany
Italy
Hungary
TurkeyFranceCzech Republic
PolandSwedenIreland
NorwayAustria
Finland
Belgium
Slovak Republic
Denmark
Slovenia
Estonia

Investment in
2005-2014(Million USD)
30 55030 11021 21916 19015 46513 90210 534
8 265
5 792
5 605
3 879
3 005
2 611
1 664
1 344
849
550
221
68
0
0
0

Country rank
Spain
United Kingdom
FrancePortugal
TurkeyItaly
GreeceGermany
Netherlands
Belgium
Ireland
PolandHungary
Slovak Republic
Austria
Finland
NorwayDenmark
Czech Republic
SwedenSlovenia
Estonia

Note: Countries are ranked by total project value (public funds and private investment). This paper analyses thecountries who received most of the private financing between 1995 and 2014. They are marked in red.
Source: Dealogic database.

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Appendix 3. Research questions and outputs of theWorking Group on Private Investment inInfrastructure
Introduction: Getting the basics right
What are the economic characteristics of infrastructure?
What is infrastructure and what are operations? What are
the models of private participation in infrastructure andthrough which significant private investment actually takes
place?

Makovšek, D. (forthcoming), “What is
Private Investment in Transport
Infrastructure and Why is it Difficult?”,
Working Group Paper, International
Transport Forum, Paris.

Can private investment improve productive efficiency?
Makovšek, D. (forthcoming), “The Role
Improve project selection? Close the infrastructure funding of Private Investment in Transport
gap? Have other positive effects when it is private?
Infrastructure”, Working Group Paper,

International Transport Forum, Paris.
What have the private investment trends in transport Mistura, F. (forthcoming),
infrastructure been over the last 20 years? How much “Quantifying Private and Foreignof that was foreign private investment?
Investment in Transport
Infrastructure”, Working Group Paper,
International Transport Forum, Paris.
Defining the challenge: How uncertainty in contracts matters
How does uncertainty affect risk pricing? Beyond
investors, do suppliers in PPPs also have issues withrisk pricing? How does its transfer to the private
sector affect competition? What does uncertainty
mean for the public vs. private cost of financing?

Makovšek, D. and Moszoro, M. (2018),“Risk pricing inefficiency in public–
private partnerships”, Transport
Reviews, 38(3), 298-321.

Is uncertainty also an issue in long-term
services/operations contracts?

Beck et al. (forthcoming), “Uncertainty
in Long-term Service Contracts:
Franchising Rail Transport
Operations”, Working Group Paper,
International Transport Forum, Paris.

What is the competition for large transport
infrastructure projects in the EU Market? Is there adifference between traditional procurement and
PPPs?

Roumboutsos, A.
(forthcoming),”Competition for
Infrastructure Projects: Traditional
Procurement and PPPs in Europe”,
Working Group Paper, International
Transport Forum, Paris.

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Addressing uncertainty for suppliers: the construction phase as example
Adversarial vs. collaborative procurement – iscollaborative contracting the future?

Eriksson et al. (forthcoming),“Collaborative Infrastructure
Procurement in Sweden and theNetherlands”, Working Group Paper,
International Transport Forum, Paris.

What lessons in dealing with risk and uncertainty
were learnt in Danish mega projects from Storebaelt
to Femernbaelt?

Vincentsen, L. and K. S. Andersson(2018), “Risk Allocation in MegaProjects in Denmark”, Working Group
Paper, International Transport Forum,
Paris.

What can governments do in the short run to reduce
inefficient pricing of risk by construction contractors?

Kennedy et al. (2018), “Risk Pricing in
Infrastructure Delivery: Making
Procurement Less Costly”, Working
Group Paper, International Transport
Forum, Paris.

Addressing uncertainty in long-term contracts in the absence of continuous pressure for
efficiency
What is the public sector organisational Holm, K.V. and T.H. Nielsen (2018),
counterfactual on which private investment should “The Danish State Guarantee Modelseek to improve?
for Infrastructure Investment”,
Working Group Paper, International
Transport Forum, Paris.
Partial fixes to the Private-Public Partnership approach
How would an organisational structure consisting of
PPPs come close to a network-wide management
approach? What benefits would it yield?

Vasallo, J. (forthcoming), “PublicPrivate Partnerships in Transport:
Unbundling Prices from User Charges”,
Working Group Paper, International
Transport Forum, Paris.

Should the public or the private side bear the cost of
long-term uncertainty? How could we design a PPP
contract to avoid hold-up due to incomplete
contracts?

Engel et al., (forthcoming), “Dealing
with the Obsolescence of Transport
Infrastructure in Public-Private
Partnerships”, Working Group Paper,
International Transport Forum, Paris.

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Long-term strategic approach
How do the PPP and regulated utility model (RAB)
compare in terms of efficiency incentives?

Makovšek, D. and D. Veryard (2016),“The Regulatory Asset Base andProject Finance Models”, International
Transport Forum Discussion Papers,
No. 2016/01, Paris.

What basic considerations underlie the choice
between a PPP and RAB approach?

Hasselgren, B. (forthcoming), “Riskallocation in Public-Private
Partnerships and the Regulatory Asset
Base Model”, Working Group Paper,
International Transport Forum, Paris.

Which are the preconditions a country would need to Alchin, S. (forthcoming), “A
take to establish a RAB model on a motorway
Corporatised Delivery Model for the
network? Is user-charging a must?
Australian Road Network”, Working
Group Paper, International Transport
Forum, Paris.
From the investors’ point of view, does a RAB need to Francis, R. and Elliot, D. (forthcoming),
be fully reliant on user-charging?
“Infrastructure Funding: Does it
Matter Where the Money Comes
From?”, Working Group Paper,
International Transport Forum, Paris.
Incentive regulation can also yield perverse
incentives. Can the capex bias be managed?

Smith et al. (forthcoming), “Capex Bias
and Adverse Incentives in Incentive
Regulation: Issues and Solutions”,
Working Group Paper, International
Transport Forum, Paris.

Does it make sense to pursue hybrid solutions
between PPP and RAB?

Zhivov, N. (2018), “The Thames
Tideway Tunnel: A Hybrid Approach to
Infrastructure Delivery”, Working
Group Paper, International Transport
Forum, Paris.

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Uncertainty and private investment mobilisation in transport infrastructure
What lessons can we draw from recent attempts tomobilise private investment in infrastructure in theaftermath of the global financial crisis?

Makovšek, D. (2018), “Mobilising
Private Investment in Infrastructure:
Investment De-Risking andUncertainty”, Working Group Paper,
International Transport Forum, Paris.

Synthesis

ITF (2018), Private Investment inTransport Infrastructure: Dealing with
Uncertainty in Contracts, Research
Report, International Transport Forum,
Paris

38

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CPB

CPB

CPB

Private Investment inTransport Infrastructure
Dealing with Uncertainty
in Contracts

The Role of Private
Investment in Transport
Infrastructure

Risk Pricing in
Infrastructure Delivery:
Making Procurement Less
CostlyCorporate Partnership
Board

Mobilising Private Investment
in Infrastructure
Investment De-Risking
and Uncertainty

Corporate Partnership
Board

4

2

Public investment in infrastructure
was the first to be cut by fiscallyconstrained governments during therecent economic crisis. Recognising
the value of infrastructure
investment as a counter cyclicalmeasure, policy makers turned to
private finance. This report examines
why this strategy was not effective.
The paper is part of a series of
19 papers and a synthesis report
produced by the International
Transport Forum’s Working Groupon Private Investment in Transport
Infrastructure.

CPB

CPB

Dealing with the
Obsolescence of Transport
Infrastructure in PublicPrivate Partnerships

Risk Allocation in
Mega-Projects in Denmark

Risk allocation in PublicPrivate Partnerships andthe Regulatory Asset Base
Model

Corporate Partnership
Board

Corporate Partnership
Board

8

Corporate Partnership
Board

10

12

CPB

CPB

CPB

The Thames Tideway
Tunnel: A Hybrid Approach
to Infrastructure Delivery

The Danish State Guarantee
Model for Infrastructure
Investment

Infrastructure Funding:
Does it Matter Where theMoney Comes From?

Corporate Partnership
Board

Corporate Partnership
Board

Corporate Partnership
Board

16

14

18

CPB

CPB

CPB

Public-Private Partnerships
in Transport: Unbundling
Prices from User Charges

A Corporatised Delivery
Model for the AustralianRoad Network

Collaborative Infrastructure
Procurement in Sweden and
the Netherlands

Corporate Partnership
Board

Corporate Partnership
Board

22

20

24

CPB

CPB

CPB

Competition for
Infrastructure Projects:
Traditional Procurement
and PPPs in Europe

Capex Bias and Adverse
Incentives in Incentive
Regulation: Issues andSolutions

Uncertainty in Long-term
Service Contracts:
Franchising Rail Transport
Operations

Corporate Partnership
Board

Corporate Partnership
Board

Corporate Partnership
Board

28

26

30

CPB

CPB

CPB

Quantifying Private andForeign Investment inTransport Infrastructure

What is Private Investment
in Transport Infrastructureand Why is it Difficult?

Mobilising Private
Investment in Infrastructure:
Investment De-Risking
and Uncertainty

Corporate Partnership
Board

Corporate Partnership
Board

32

1

6

CPB

Corporate Partnership
Board

International Transport Forum
2 rue André Pascal
F-75775 Paris Cedex 16+33 (0)1 73 31 25 00
contact@itf-oecd.org
www.itf-oecd.org

Corporate Partnership
Board

Corporate Partnership
Board

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