Private investment for public infrastructure

Deea Ariana, who graduated with a master’s from SAIS last spring, writes: 

One of the inevitable costs of conflict is the damage to critical infrastructure that provides basic services to people and stimulates economic growth. Yet infrastructure procurement in post-conflict contexts is often slow and unable to cope with rising demand. Raffi Mardirosian argued that in the aftermath of conflict, an environment fraught with financial and political risks and weak legal structures hinders the construction and operation of infrastructure projects.

Conflict-affected states lack capital, technology, and skilled management that are essential to constructing new infrastructure. Consider Syria: The International Monetary Fund (IMF) states that rebuilding damaged physical infrastructure will be a “monumental task,”with cost estimates in the range of $100-$200 billion. That is nearly three times the country’s GDP back in 2010, before the conflict erupted.

The ongoing war continues to take a heavy toll on civilians and infrastructure. As Merriam Mashatt, Daniel Long, and James Crum note:

In conflict-sensitive environments, the condition of infrastructure is often a barometer of whether a society will slip further into violence or make a peaceful transition out of the conflict cycle. The rapid restoration of essential services, such as water, sanitation, and electricity, assists in the perception of a return to normalcy and contributes to the peace process.

Increasing access to infrastructure service delivery amid fiscal and capacity constraints calls for an alternative to the traditional public provision of infrastructure.

The idea of private investment in infrastructure has gained currency in recent years, leading to creation of public-private partnerships, or PPPs. These are a way for governments to implement infrastructure and services by utilizing the expertise of the private sector. Both parties share significant risks and management responsibilities.

Gonzalo Araya and Jordan Schwartz explain that private participation in infrastructure in countries emerging from conflict typically requires six to seven years to attract significant levels of investment from the day that the conflict is officially resolved. Usually the first infrastructure investments to arrive in conflict-affected countries are in sectors where financial risk is relatively low, which is mostly in telecommunications, as in Afghanistan and Iraq. Private investments in sectors where assets are harder to secure, such as water, power, or roads, are slower to appear or simply never occur.

There are several challenges to infrastructure reconstruction in conflict-sensitive environments that need to be addressed. P. B. Anand delves into these, explaining that weak governance entails corruption and flawed regulatory oversight, insecurity, and fragmented legal systems that discourage foreign investments. The government of a conflict-affected country must mitigate these challenges to nurture a favorable investment climate and encourage private investment in PPPs.

Donor support can also go a long way. As Andre Jones writes, PPP transactions are likely to rely on donor support in the form of capital subsidies, guarantees, or other mechanisms to facilitate private investment. An often-cited example is that of the restoration of Liberia’s power sector following the civil war in 2003. With support from the Norwegian government, the Liberia Electricity Cooperation (LEC) handed over its management to a Canadian power company, which boosted results. LEC began rebuilding electrical distribution in Monrovia, which led to more people having access to electricity and a significant increase in revenue. Losses were curtailed, peak load more than doubled, and fuel efficiency improved.

While public infrastructure projects accrue a net benefit to society as a whole, they nonetheless result in winners and losers. It is necessary to ensure that services also reach those people who are otherwise socially excluded. This guarantees that the society does not risk relapsing into another fresh bout of conflict by fighting over scarce resources.