Even when infrastructure is considered "too important to fail," private finance can still be an option.
For private finance to be an option one needs to evaluate the robustness and sustainability of the different financing options throughout the asset life. It is also necessary to consider what sort of failure might occur- whether it be a gradual erosion of service, the financial collapse of the private-sector party, or the sudden and complete shutdown of the asset-and how to mitigate the impact of such a failure. The tradeoff between the level of fees or charges for the infrastructure and the robustness of financing should be analyzed explicitly.
Given the long life of many infrastructure assets, parties must explicitly address all the tradeoffs within different commercial, contractual, and financing approaches.
It is often very difficult for both the private and public parties to forecast costs and revenues over the long term, particularly when those costs and revenues depend on public usage. But the consequences of getting this wrong may be considerable. Governments risk incurring the public's wrath if the concessionaire makes too big a profit, while the concessionaire risks going bankrupt if it loses too much money.
Contract or concession length should be determined by consumer and investor considerations - not necessarily the life of the asset.
Three key factors should be considered when setting contract or concession policy. First, if the infrastructure is monopolistic, how should the protection of consumers be balanced with maintenance of any necessary capital investment? While a monopoly might lead to a shorter contract, the protection of consumers might lead to a longer one. Second, if debt is being raised to fund infrastructure development, over what period will it be repaid? Forcing repayment over a short period could result in higher, potentially unaffordable, fees or user charges. Third, how long will investors need to achieve an "acceptable" level of return-and what is "acceptable"?
Private financiers will not invest in infrastructure without institutional certainty.
Whether or not private financiers choose to invest is determined not just by the details of the specific transaction but also by the wider political, legal, and economic environment, including any uncertainties about how governments themselves may act at any stage. We believe this is as much an issue in developed economies as in emerging ones, and seeking private-sector participation is no substitute for developing the institutions that create an environment conducive to investment.
Understanding and managing public perception are integral to the success of any deal.
Both public and private parties may not always fully appreciate consumer sentiment. In fact, public sentiment can make or break a deal-and responses vary depending on the nature of the infrastructure. People are used to the idea of mobile phone networks being in private hands, for example. However, they often regard other forms of infrastructure, especially social infrastructure, as the exclusive domain of governments. It is important to involve the public in every stage of the process, to articulate the options clearly, and to ensure that transparent methods for measuring and maintaining operational quality exist. Mechanisms such as profit sharing may mitigate concerns about excessive profits for the private party.