Mitigating risks on infrastructure implementation in developing countries
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The document discusses the critical role of infrastructure in the development of economies, especially in developing countries, highlighting the paradox of insufficient investment in infrastructure despite high demand. It outlines risks associated with infrastructure investment, emphasizes the importance of risk management strategies, and suggests community involvement, project finance, and public-private partnerships as solutions to enhance resilience and effectiveness. The conclusion stresses the need for collective action to mitigate risks and improve living conditions through better infrastructure development.
Mitigating risks on infrastructure implementation in developing countries
- 1. Mitigating risks on infrastructures implementation in developing countries
- 2. 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.
- 3. 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
- 4. 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
- 5. 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
- 6. 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
- 7. 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
- 8. Protection How can infrastructures be shielded the averse effects caused risks? Protection measure? Which is the best option? Which option is available?
- 9. 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?
- 10. 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
- 11. 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
- 12. Specific strategies that can be implemented at each levels of the onion diagram Onion diagram – World Development 2014 team
- 13. 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,
- 14. 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
- 15. 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.
- 16. 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.
- 17. 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
- 18. 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
- 19. 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
- 20. 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.
- 21. Conclusion A collective action can help mitigate risks and share the risk at each level, allowing a better implementation of infrastructure that will support development initiatives and by reflection reduce poverty, improve condition of living and build capacity at each level to handle different type of challenges with the risks that come with them