75912 February 2013 PPIAF’s Global Knowledge Portfolio Technical Assistance for Multi-Sector Global Knowledge Products Mechanisms to Mitigate Regulatory Risk in Private Infrastructure Investment Regulatory risk is a key concern for most private sector investors in developing countries. While products such as insurance are available to mitigate political risk, these products do not always cover the potential loss of revenue from a failure to implement the regulatory framework or arbitrary changes to this framework. In 2005 the Private Infrastructure Development Group requested PPIAF assistance to analyze the extent to which regulatory risk was impeding infrastructure investment in developing countries and to assess various approaches and mechanisms to mitigate this issue. The report concluded that it is critical for investors and lenders to focus on projects with strong fundamentals, as robust projects are less likely to require changes (e.g., tariff reform) that increase the potential exposure to regulatory risk. It also noted that regulatory risk is covered by many existing products—such as the World Bank Group’s partial risk guarantee for low-income countries—but that investors were not always aware of these products. The report recommended mainstreaming these products and increasing their flexibility to allow them to be applied in a variety of investment environments. Finally, the report highlighted the importance of “regulation by contract� in countries with weak regulatory regimes and the need to settle disputes in neutral environments, preferably through international arbitration. A workshop held in London in September 2005 brought together approximately 30 participants from international finance institutions, regulatory agencies, operators, and governments to discuss the findings of the draft report. The discussion at the workshop initiated a broader conversation on the role of risk mitigation instruments and innovative use of these instruments that continued beyond the PPIAF activity. Results of PPIAF’s Activity “Mechanisms to Mitigate Regulatory Risk in Private Infrastructure Investment� Category Outputs Capacity and awareness building  Dissemination and discussion workshop held in London, Workshops/seminars September 2005 Knowledge products produced or  Mechanisms to Mitigate Regulatory Risk in Private disseminated Infrastructure Investment, December 2005 Category Outcomes Capacity and awareness building  Consensus achieved on need to create innovative risk Consensus achieved mitigation products Technical Assistance through the Sub-National Technical Assistance (SNTA) Program Land is frequently sub-sovereign governments’ most valuable asset, and land-based financing is a critical component of sub-national financing. In 2008 PPIAF provided support through its SNTA program to examine the integration of land financing into the broader fiscal management framework for sub-national governments. In order to use land transactions to finance its budget, a sub-national entity must first identity and value surplus land. The study found that many sub-nationals do not have sufficient information on their land holdings, which makes it difficult to assess the potential fiscal risks that could 1 arise from using land-based financing. The study identified the use of land sales, which are a one-time occurrence for each parcel of land that is sold, to finance ongoing operating expenses as the primary fiscal risk for sub-nationals that use land-based financing. In addition, the study examined the use of land as collateral for loans, which can increase the fiscal risk to sub-nationals if land values decline. Finally, the study assessed current and emerging practices for managing fiscal risks, and recommended that capital revenues generated through land sales should be used for capital investments, which reduces the risk of using one-time revenues to finance ongoing operating expenses. A workshop was held on September 10, 2009 to discuss the findings of the draft report. The workshop addressed key issues addressed in the paper, as well as the broader issues related to land financing. Participants discussed the relationship between land financing frameworks and the larger land management agenda. The lack of financial management, planning, and sustainable development capacity in municipalities is a key constraint to improved infrastructure service delivery in developing countries. In 2011 PPIAF partnered with the Agence Française de Développement to deliver a series of workshops to build the financial management capacity of local authorities. Five workshops were held between May and December 2011. A range of topics were addressed, including strategic urban planning, financial analysis, local finance tools, and the management of urban public utilities. Private sector participation in local service delivery was also examined, and two of the workshops discussed the use of public-private partnerships to improve service delivery to the poor. The global financial crisis posed considerable new challenges to sub-sovereign governments seeking to access market-based finance, including falling revenues, increased refinancing risks, and reduced bank lending to sub-national entities. In 2009 PPIAF supported the creation of a sub-sovereign finance forum to address these issues. The forum was held in Washington, DC on June 20, 2011, and included participants from 13 different countries. Speakers from Brazil, India, and Mexico shared their experiences with state debt restructuring in the 1990s and early 2000s, and discussed the reforms the three countries undertook as a structure of these crises. Participants from China, the Philippines, Russia, and the United States also shared their reform experiences, while speakers from several countries identified the challenges of addressing weak demand for debt instruments from sub-national borrowers. The forum concluded that while the global financial crisis had adverse effects on many governments, earlier reforms to help countries manage their sub-national debts had alleviated some of these effects. Results of Global SNTA Activities Category Outputs Capacity and awareness building  Workshop on integrating land financing into sub-national fiscal and debt management, September 10, 2009  Seminar on strategic urban planning, May 9–20, 2011  Seminar on types of public-private partnerships, June 6–16, 2011  Seminar on local finance tools, June 20–July 1, 2011 Workshops/seminars  Seminar on urban public utilities management, November 21– December 2, 2011  Seminar on designing public-private partnerships, December 2011  Sub-Sovereign Finance Forum – Debt, Insolvency, and Market, held in Washington, DC on June 20, 2011 Knowledge products produced or  Integrating Land Financing into Sub-National Fiscal disseminated Management, August 2010 2