Construction risk can be mitigated through contractual arrangements, which de-emphasizes the importance of the project phase in investment. A more important question is whether new opportunity concerns developing a new market, such as a toll road where there is no history of tolling; or if it is about new technology or design, as in the renewable energy sector; or whether the approach itself is novel. Brownfield opportunities may well have a construction element-for example, to renew or expand existing infrastructure-but there will already be a track record of the performance and operation of the asset and its revenue generation. A more relevant terminology would describe infrastructure in three ways:
∙ new and tested,
∙ new and innovative, or
∙ established.
These terms better address the true nature of the construction/development risk-that is, can the infrastructure be built and, more importantly, will it work as planned-and thus the timing of costs and revenues. Table 1 summarizes the characteristics of these three new groupings. The simple matrix in Figure 1 show how these different characteristics might apply to certain project types.
Table 1: Characteristics of new infrastructure categories
| New and tested | New and Innovative | Established |
DEVELOPMENT | An existing pool of experienced contractors is competent to do the work required. Contractors are willing to commit time and price with substantial liabilities if planned completion not achieved. | Few or no experienced contractors are available to do the work required. Few contractors are willing to commit to a time and price and/or provide performance guarantees. | This category is not applicable unless there is an element of renewal or expansion, in which case the principles for new but not innovative or for new and innovative apply. |
TECHNOLOGY | Design and materials are tried and tested, even if they are applied in a new context. | Untested | This category is not applicable unless there is an element of renewal or expansion, in which case the principles for new but not innovative or for new and innovative apply. |
REVENUE: AVAILABILITY | The start of revenue payments is only dependent on achieving the required performance and availability. | The start of revenue payments is dependent on full commissioning and achievement of the required performance and availability over sustained period. | There will be a track record of availability and performance. |
REVENUE: DEMAND | Demand depends on usage and the time taken to establish it. | In addition to the risk of usage and time taken to establish demand, it also depends on full commissioning and achievement of required performance and availability over sustained period. | There will be a track record of usage and whether or not a steady pattern has been established. |
Source: World Economic Forum analysis.
Taking this theme of development, technology, and revenue a step further, what follows is a more detailed commentary on the approach private financiers might take, as well as some actions to address the issue of determining the type of infrastructure in which they are interested.
"The problem with developing new infrastructure is there can be a binary result- it either works or doesn't-which is why investors look for tried and tested approaches to be adopted." - Stephen Vineburg, Chief Executive Officer, Infrastructure, |