Projects that involve new technologies, such as a new type of incinerator to generate energy from waste, may well be a red flag for private finance. If the incinerator turns out not to work, no energy can be generated from it and no income received. The cost and time that will be needed to complete remedial works may be too great to make the overall project's economics viable.
Historically, the development of new technologies or infrastructure sectors has either relied on manufacturers or contractors assuming the risk or has relied on public funds to develop the first generation.
The problem with relying on manufacturers or contractors is that they need to be willing to take all the risk of any performance failures or shortfalls. Such an approach requires a manufacturer or contractor who can either put up significant guarantees that investors can access easily-which may mean they will need to be insured, bonded, or cash collateralized-or who have demonstrable financial strength to support corporate covenants behind contractual guarantees.
Alternatively, the public sector can retain, publicly fund, or support the first generation of a new technology in order to establish a track record and stimulate the market. Private finance will then come in to fund future projects. This can be a more realistic approach. The publicly funded method is prevalent in the renewable energy sector. The American Recovery and Reinvestment Act 2009 contains a provision for loan guarantees to newer technologies,3 and many countries offer "feed-in-tariffs" to guarantee power prices for renewable energy around the average market rate.