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To attract private sector investment and deliver the next generation of infrastructure investment, governments’ role in the sector must change from being that of an ‘owner’ to one of an ‘incubator’, says international law firm Freshfields Bruckhaus Deringer. Traditionally, government has acted as the primary owner of many major infrastructure assets. However, with government subject to a severe fiscal squeeze, Freshfields suggests that it should instead act as a pump-primer, initially funding or underwriting financial risk, and sub-dividing infrastructure projects into units or tranches that can be privatised during the build phase allowing government to exit from ownership and financial commitment before a project is finished rather than several years after completion. Nick Bliss co-head of Freshfields’ global infrastructure and transport group, comments: ‘Governments have a really tricky balancing act to perform, continuing to invest in infrastructure as a way of boosting economic growth while plugging the gaping holes present in national budgets. The two-pronged solution we expect to see more of is the continued sale of infrastructure assets to generate cash and crucially remove large liabilities off the government balance sheet alongside renewed efforts to attract private sector finance into infrastructure investment and delivery.’ The new financing and ownership model suggested by Freshfields, dubbed IBIS (Incubate, Build, Intermediate, Sell), would allow government to migrate large infrastructure liabilities off its balance sheet quickly and see it acting as an ‘incubator’ of major infrastructure projects rather than the primary owner, intermediating large infrastructure assets for the private sector rather than being the ultimate client. ‘As project stages are built they would then be sold off stage by stage to allow government to exit from ownership and financial commitment on major infrastructure projects rather than selling the asset in its entirety several years after completion as has traditionally been the pattern. Under the present financial circumstances this seems to be a sensible way to allow large infrastructure projects make it off the drawing board,’ he says. ‘Despite the financial crisis, the current environment is fertile ground for encouraging the private sector to take a greater role in infrastructure investment. Financial investors such as pension funds are keen to acquire long-term assets to match their liabilities and the experience of full privatisation projects and of PPP and PFI has given the private sector experience in managing key national assets. The challenge is to harness this capability and encourage the private sector to take on more of the greenfield, or semi-greenfield, risk,’ he continued. Despite global financial woes, the next generation of investment will be of massive proportions – according to industry estimates $2.2trn in the US and £500bn in the UK alone by 2020. ‘This is a greater quantity of financial risk than the private sector will be prepared to take on,’ according to Bliss, ’and governments will need to play a vital role in supporting infrastructure delivery but to do so effectively they must change in key areas,’ said Bliss. ‘Firstly, government need to set out priorities for medium- to long-term infrastructure programmes. This strategy is best put together by a central unit that can oversee all areas of potential investment and avoid distracting competition for resources between individual government departments. This will ensure that investors and contractors can plan ahead. It is the approach earmarked by the recently instituted Infrastructure UK which itself mirrors similar examples in New Zealand, France, Australia and Canada and paints a clear picture of how things are likely to develop.’ ’Secondly, governments can provide initial funding or underwrite financial risk. This could take the form of the state taking on the senior level of debt with the private sector taking on the riskier elements. Alternatively the government could commit a small level of funding in order to leverage lending from the private sector.’ Finally, by replacing the traditional government ownership model, at least for the larger projects, with a staged privatisation model (IBIS) where the government plays a vital role in underwriting the initial stages of financial risk in the project,’ he says.
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