Managing Government Exposure to Private Infrastructure Risks

The privatization of infrastructure should lead to the development of new infrastructure, improvements in the operation of existing infrastructure, and a reduction in budgetary subsidies. Whether countries reap the full benefits of privatization, however, depends on how risks are allocated. If, as is often the case in developing countries, governments assume risks that should be borne by investors, they may reduce incentives for efficiency and incur significant liabilities. To solve these problems, governments need to improve their policies and restrict their risk bearing to certain political and regulatory risks over which they have direct control. When a government provides guarantees, it should attempt to measure their cost and improve the way they are handled in the accounts and budgets. Measurement and budgeting are critical to improving decisions about the provision of guarantees, to improving project selection and contract design, and to protecting governments from unknowingly entering into commitments that might jeopardize future budgets. The resurgence of private infrastructure in the past decade should have large benefits for developing countries. Compared with government enterprises, private firms typically have stronger incentives to build and run infrastructure businesses effectively