Europe Mobilizes Private Finance for Infrastructure Development
- Aug 4, 2011 12:14 am GMT
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We are today faced with a great infrastructure challenge, one that is compounded by climate change. It is no longer enough to build new transport networks or establish waste management systems. We have to use smart technologies while doing so, to minimize the impact on the environment, and also make the infrastructure resilient to extreme weather.
The big question is: where’s the money? The public sector, which has traditionally driven infrastructure development, is already being asked to tighten its purse strings. Having rolled out stimulus packages to revive their economies in the wake of the financial crisis, governments now have to tread a fine line between fiscal consolidation and infrastructure development.
The growing interest among European countries to secure private funding, therefore, comes as no surprise. Spain and France are prime examples here; both countries are actively seeking private investments to prevent a decline in infrastructure funding. In fact, European Investment Bank estimates put Spain as the biggest beneficiary among European nations that partnered with private investors in 2010.
Others, too, are following suit. Germany, traditionally cautious of private sector funding, saw a significant jump in partnerships with private investors at the height of the financial crisis in 2008-09, even as deal flow in mature markets such as the UK waned.
However, private funding of infrastructure comes with its own share of challenges, including political and regulatory risks. What is required is a clear division of roles between the government and the private investors and more specifically, the right allocation of risks, especially demand-revenue risks.
Mitigating these risks will be important for any country aiming to promote private investments. The UK government, for instance, has outlined several measures in its National Infrastructure Plan 2010, which sets out its vision for infrastructure development, to increase private financing. With investment requirements over the next five years totaling £200 billion, the UK is looking at a mix of funding models, new sources of private capital, reducing the level of risk transfer to the private sector and addressing regulatory hurdles.
What we are witnessing in the UK is a natural evolution. As consumers demand higher standards of living without a corresponding increase in their taxes, more and more countries will create innovative financial solutions and seek private investments to address the infrastructure challenge.
Photo by phaser4.