Improving the Landscape for Sustainable Infrastructure Financing

4. Legal and regulatory barriers to quality infrastructure investment

Mamiko Yokoi-Arai

Maria Teresa Roca de Togores

Abstract

This chapter brings together studies on legal and regulatory barriers on QII, to bring a better understanding to what these barriers are. It examines the main areas that have been raised as barriers and collates where further examination could be necessary.

4.1. Introduction

One of the common areas that investors claim affect their investment decisions into infrastructure has been legal and regulatory barriers. However, legal and regulatory barriers can be different depending on the investor, type of infrastructure, and country in which the infrastructure is based. Thus, if governments are to address this to attract more private investment, a better understanding of what may constitute legal and regulatory barriers is necessary.

In an attempt to bring a more granular understanding to these barriers, the OECD is developing a report that would try to specify the nature of these barriers based on a table of classification that the Secretariat has developed (Annex 4.A). The table was shared with D20‑Long-term Investors Club members which constitutes national development banks, a network of institutional investors, and G20 Infrastructure Working Group (IWG) members for responses on specific laws and regulations that could create barriers.

This preliminary note is based on responses that were provided by EIB, Italy’s CDP, the Lithuanian Ministry of Finance, the Inter-American Development Bank (IDB), the Japanese Bank for International Co‑operation (JBIC), and Korea’s ExIm Bank.1 Given the limited number of responses, this note only includes observations of Europe, North America, Latin America, and Asia. To ensure that the report can reflect a fuller view of what may be causing investors’ hesitancy, participants to the Task Force are encouraged to provide inputs and reports that could support this report. It is hoped that with more information, the report can be developed to reflect all continents and the variety of aspects.

With a fuller collection of information, the next phase of this project could examine ways the barriers identified in specific areas can be reformed, by analysing other markets where they do not constitute a barrier. This would permit the Task Force to develop an understanding of legal, regulatory and procedural frameworks that could support greater private sector financing.

4.2. Table of classification of quality infrastructure investment

The table of classification (see Annex 4.A) has been developed using the OECD Compendium of Policy Good Practices for Quality Infrastructure Investment (2020), OECD Implementation Handbook for Quality Infrastructure Investment (2021) and OECD FDI regulatory restrictiveness index, as well as input from within the OECD Secretariat. The table looks at the investment side (the recipient side of investment) and at the financing side (including regulatory aspects that shape the supply of capital for infrastructure). For completeness’ sake, aspects of financial risks have also been included although going beyond legal and regulatory barriers.

This preliminary note looks at an initial sample of seven responses and reports to understand the overarching barriers that investors and financial institutions face globally.

The heterogeneous responses received at this early stage call for a regional approach in this preliminary analysis. Based on those responses and on additional reports referred by respondents, this note provides an overview of the perceived most pressing challenges that are preventing infrastructure investment and development including, but not limited to, legal and regulatory barriers.

Section 4.3 draws on several reports provided by the European Investment Bank (EIB) regarding the state of affairs of infrastructure investment and regional and rural development in the European Union to collect information on regulatory barriers encountered both by the financing side (European firms) and by the investment side (municipalities). Section 4.4 looks at North America in relation to the United States’ firms responding to the EIB Investment Survey. Section 4.5 examines developments in Latin America and Caribbean. Section 4.6 focuses on the limitations to Public-Private Partnerships (PPPs) in a group of Asian countries, reported by the Asian Development Bank in the 2019 PPP Monitor report.

4.3. Europe

This section focuses on the legal and regulatory barriers for infrastructure investment present in the European Union (EU). The bulk of the information comes from the EIB Investment Survey 2021, the EIB Municipalities Survey 2020 titled “The State of Local Infrastructure Investment in Europe”, and from direct responses to the OECD barrier classification questionnaire from European investors, among other sources.

Additional responses from German participants illustrate the capital and solvency regulatory barriers present in Germany and the EU at large under the Solvency Capital Requirements (SCR) Solvency I (pension funds and small insurers) and Solvency II (regulated insurers) directives.

It is important to point out that each source provides responses from a different perspective. EIB Investment Survey collected data from European firms of all sizes across four main economic sectors: manufacturing, construction, services, and infrastructure (Delanote and Rizzoli, 2021[1]). The report on the State of Local Infrastructure Investment, on the other hand, gathered data from municipalities receiving financing across the EU (McGoldrick and Debs, 2021[2]).

4.3.1. Infrastructure investment: Focus and gaps

Among the respondents to EIB investment survey, 82% believed that they had invested the right amount between 2018 and 2021; out of all those firms, 78% came from the infrastructure sector (Delanote and Rizzoli, 2021[1]). However, this data does not reflect the potential investment gap that might exist between public and private investment, and this becomes more evident in the EIB survey for municipalities.

Municipalities report that the implementation of austerity policies in many EU member countries has prevented public investment in climate transition and infrastructure projects, and therefore have exacerbated regional differences and widened the investment gaps among them (McGoldrick and Revoltella, 2021[3]). Indeed, many gaps identified are related to climate change, digitalisation, and urban transport, which are the areas with the most pressing need for investment in the EU (McGoldrick and Debs, 2021[2]).

An additional problem stems from the fact that gaps are not homogenous, as smaller and poorer regions tend to identify more and wider investment gaps (McGoldrick and Debs, 2021[2]). In these areas – which usually have a GDP/capita below 75% of EU average (Delanote et al., 2021[4]) – gaps are more severe and common when related to basic infrastructure, such as transport, social infrastructure, and water and waste utilities (McGoldrick and Revoltella, 2021[3]). Similarly, about 75% of less developed municipalities report investment gaps in climate change mitigation (Delanote, Kolev and Rizzoli, 2021[5]).

Ongoing cohesion policies across EU addressed specifically at less developed and rural areas are crucial to ensure progress in the recovery after the COVID‑19 crisis (Ferreira, 2021[6]). Economists at the EIB also emphasise the important role that public development banks and institutions can play in overcoming these barriers through regulatory reform that will enable investment and by providing municipalities with innovative resources to improve their resilience.

Regarding SCR’s effect on German supply of capital for infrastructure, Solvency I directive sets concrete stress level requirements for pension funds and small insurers. In addition, it also regulates quantitative investment regulation with quotas on investment vehicle allocation, while it does not consider infrastructure as an investment category.

4.3.2. Main challenges and constraints

In 2021, EU firms were considerably more optimistic about the economic outlook than in 2020, especially in terms of economic climate and business prospects. Despite this positive shift in the past year, firms remained pessimistic about the political and regulatory climate (Delanote and Rizzoli, 2021, p. 18[1]).

The main barriers to investment that EIB Investment Survey respondents identified for investment are:

• Availability of skilled staff (79%)

• Uncertainty about the future (73%)

• Business regulations (~ 65%)

• Energy costs (~ 65%)

These constraints are the same as those identified by firms in the infrastructure sector as most pressing for infrastructure investment and development.

In addition, access to finance also comes up frequently as a barrier for investment in the EU. The information from the municipalities can shed some light in this regard. As mentioned before, stricter austerity policies and a decrease in public funding resulting from the global financial crisis and the pandemic limited considerably the ability to develop infrastructure in the EU. The following are the most important barriers, which complement those reported by EU firms:

• Length of regulatory process (85%)

• Regulatory uncertainty (83%)

• Lack of funding (76%)

• Lack of technical capacity (72%)

Although lack of funding does not rank at the top of the list of barriers identified by surveyed municipalities, almost 55% of them reported lack of funding as the most pressing barrier they encounter regarding financing infrastructure projects.

Additionally, 88% of larger municipalities generally reported that agreement among stakeholders represented an important barrier as well (McGoldrick and Debs, 2021, p. 17[2]).

There appears to be a correlation between the barriers identified on the firms’ side and those from the municipalities’ side, particularly in what pertains to the role and state of infrastructure and the existing obstacles to investment:

• The less developed or more economically lagging a region is, the less attractive it becomes to investors, who might be risk averse in relation to infrastructure projects.

• The more financially constrained a company is, the less investment in R&D and intangibles, and the less financing for projects.

• 72% of municipalities find a lack in technical capacity in their constituencies and 79% of firms find a barrier in accessing skilled staff for their corporate and infrastructure investment projects in the region.

• Some 65% of firms find constraints in business regulations. This might be affecting the municipalities’ ability to access private funding and their capacity to establish PPPs. It could also be affecting the length of the regulatory process, which 85% of municipalities find burdensome.

• The general sentiment of uncertainty about the future (73% for firms) and pessimistic view on the political and regulatory situation might affect stakeholders’ ability to come to business and financial agreements regarding infrastructure projects.

4.3.3. Preliminary areas of barriers

Based on the table in Annex 4.A, the following barriers correspond to the current investment landscape in the European Union.2 The areas below do not represent an assessment of barriers, but areas that have been generally identified as requiring more attention.

Table 4.1. Legal, regulatory and procedural barriers in the European Union

INVESTMENT SIDE (regulatory factors that shape the attractiveness of infrastructure for investors)
Essential security interests (can be derived by either national security or economic protectionism concerns)
Investment screening** (construction sector)
Financial related
Appropriate risk mitigation tools not available**
Credit rating scores low or unavailable**
Risk factors
Regulatory risks
Schedule too long
Compliance with ongoing regulation–Too onerous and costly to perform**
Uncertainty of regulation
Complexity/lack of coherence of regulatory standards across jurisdictions/sectors
Inadequate ESG framework for investors
Insufficient/non-standardised environmental considerations
Insufficient/non-standardised social considerations
Poor resilience considerations
Climate change‑physical risk*
Climate change‑transition risk**
Social risks*
Insufficient data available for risk analysis**
Financial data related reporting
Non-Financial reporting
Political risks*
PPP and project finance frameworks
Lack of supportive framework for PPPs and concessions lacking (private) **
Lack of supportive frameworks for project finance (Western Balkans investments) **
Lack of lender step-in rights (private) **
Procurement regulations
Lack of stability and predictability of regulatory regime (public) **
Lack of supportive framework for effective tendering and contract management (public) **
Lack of supportive framework for integrating ESG and macro aspects in procurement process (public) **
FINANCING SIDE (including regulatory aspects that shape the supply of capital for infrastructure)
Capital regulation/Solvency regulation *
Quantitative investment regulation
Restrictions on direct or ownership of unlisted companies
Sectoral regulation *
Prudential regulation
Quantitative restrictions for pension fund investments
Capital market regulation
Limited availability of debt capital market instruments **
Restrictions on private placement of infrastructure debt **
Risk considerations
Insufficient applicable ESG considerations
Regulatory requirements for environmental considerations
Regulatory requirements for social considerations
Regulatory requirements for governance considerations

*: Delanote and  Rizzoli (2021[1]), EIB Investment Survey 2021 European Union Overview, European Investment Bank, https://www.eib.org/attachments/publications/eibis_2021_european_union_en.pdf (accessed on 15 April 2022).

**: Information shared by the Cassa Depositi e Prestiti (CDP) in Italy.

4.4. North America

Through the EIB work on its Investment Surveys, which address firms in Europe and the United States, it has been possible to understand the investment barriers faced by US firms similar to European firms. The information in this section comes from the specific EIB Investment Survey 2021 Country overview: US. Unlike for Europe (see Section 4.3), the analysis about the US barriers to investment is limited, lacking information from the receiving end of investment, and without direct input from the US.

4.4.1. Infrastructure Investment: Focus and Gaps

Although the level of investment was lower in the United States than in the EU in 2020, the rebound after COVID‑19 was also stronger in the US, exceeding pre‑COVID‑19 investment levels by Q3 of 2021 (Delanote, Kolev and Rizzoli, 2021, p. 2[5]).

Similar to the EU, the largest investments from US firms was on replacement of building and equipment (43%); in this category and just like in Europe, infrastructure firms held the largest share (44%) (Delanote, Kolev and Rizzoli, 2021, p. 3[5]). A more specific categorisation within the Survey indicates that US firms focused on tangible assets, with 43% investing in machinery and equipment, and 21% on land, building and infrastructure (Delanote, Kolev and Rizzoli, 2021, p. 3[5]).

A majority of US firms reported that they do not see any gaps in their investing, with 77% believing that they invested the right amount in 2021 (Delanote, Kolev and Rizzoli, 2021, p. 6[5]). Again, due to a lack of information from investment recipients, it is difficult to comprehend whether other barriers to infrastructure investment might exist in the United States.

4.4.2. Main challenges and constraints

As mentioned in Section 4.3, US firms’ sentiment about the economy and investment possibilities improved compared to 2020 and even exceeded European levels. This might be due to a better perception regarding access to finance in the United States. Indeed, around 50% of EU firms considered availability of finance as a constraint, while this percentage amounted to 35% in the US, where it was considered a much smaller obstacle than in Europe (Delanote, Kolev and Rizzoli, 2021, p. 11[5]).

Conversely, like in Europe, the one measure that US firms remain pessimistic about is the political and regulatory climate, which rated not only in the negative but also lower than in Europe and lower than the previous year (Delanote, Kolev and Rizzoli, 2021, p. 10[5]). This remains an area of concern in the short-term for US firms, as they perceive that the political environment will not improve in the next year.

As of 2021, US firms reported the following measures as most pressing long-term barriers:

• Availability of skilled staff (92%)

• Uncertainty about the future (77%)

• Business regulations (~ 71%)

• Labour market regulations (70%)

The EIB Surveys consider nine different measures as barriers to investment. In 2021, US participants selected more measures compared to previous years (Delanote, Kolev and Rizzoli, 2021, p. 11[5]). This slight behavioural shift can be an indicator of the increased complexity of barriers to investment in developed economies. One single measure might not appear as a major obstacle anymore. Rather, many measures rating as relatively neutral obstacles might aggregate, in fact, to a bundle holding greater relevance to the firm or the stakeholder future investment plans.

4.4.3. Preliminary areas of barriers

Based on the full barrier classification table in Annex 4.A, the following barriers correspond to the current investment landscape in the North America.3 The areas below do not represent an assessment of barriers, but areas that have been generally identified as requiring more attention.

Table 4.2. Legal, regulatory and procedural barriers in North America

INVESTMENT SIDE (regulatory factors that shape the attractiveness of infrastructure for investors)
Risk factors
Regulatory risks
	Compliance with ongoing regulation–Too onerous and costly to perform
Poor resilience considerations
	Climate change‑transition risk
	Social risks
Political risks
FINANCING SIDE (including regulatory aspects that shape the supply of capital for infrastructure)

4.5. Latin America and Caribbean

In 2019, the Inter-American Development Bank (IDB) published a report looking at PPPs legislation in in Latin America and the Caribbean aiming at studying existing legal frameworks, identifying best practices, and establishing guidelines on PPPs4 applicable to the region. The study also relied on the participation of a team from the Global Infrastructure Hub and on the contribution of prominent lawyers from the countries included in the report (Lembo et al., 2019, p. 3[7]).

As a country-by-country analysis trying to identify regional similarities and current regulatory landscapes, the report focuses on the enabling capacity of legislation and on transferable best practices, but does not explicitly address the barriers inherent to the existing regulation. Drawing on the Barrier Classification Table (Annex 4.A) and on the specific analysis contained in the IDB report this note tries to bridge the barrier gap by creating a parallel between the rest of the note and the specifics in the Latin-American case.

The report covered 17 countries in the region: Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, and Uruguay. Most PPPs and infrastructure projects are located in Brazil, Mexico and Colombia, and 83% of projects in the region are developed in the transport sector. (Lembo et al., 2019, pp. 13-15[7])

These countries’ aggregate GDPs represent 76% of the regional GDP. Yet, while the there is a global need of USD 94 trillion in investment (Lembo et al., 2019, p. 5[7]) and the infrastructure financing gap is estimated to reach USD 15 trillion by 2040 (Global Infrastructure Hub, 2021, p. 10[8]), Latin-American countries’ investment on infrastructure development represents 3.5% of annual GDP, which is below the recommended level for the region to close the gap.

The study shows that 15 countries operate under civil law, whereas two – Jamaica and Trinidad and Tobago – do so under common law. This difference in legal models affects the nature of the PPP laws and regulations in place. In general, countries under civil law present more specific statutes and regulations, while countries under common law rely on case law to set legal precedents (Lembo et al., 2019, p. 10[7]). Nevertheless, different historical and political contexts of democratic consolidation in the region also affect the development of these laws, which vary significantly between countries and present a heterogeneous regional landscape for PPPs regulatory frameworks. The study identifies three groups according to the existing regulations (Lembo et al., 2019, p. 20[7]):

• Countries with only a concession Law

• Countries with both a concession and a PPP Law

• Countries with only specific PPP Law

The IDB report analytical framework establishes 14 principles that are considered necessary to design and establish sound regulatory frameworks that enable PPPs and infrastructure investment.

Table 4.3. Fundamental principles for PPP legal and institutional framework

	Principle		Principle
1	Legal and institutional framework	8	Dealing with charge
2	Applicable sectors and activities	9	Financing, funding, and guarantee
3	PPP monitoring and regulation	10	Extraordinary event
4	Modelling PPP projects	11	Public authority’s prerogative
5	Procuring a PPP project	12	Risk allocation
6	Income structure	13	PPP termination
7	Dispute settlement	14	Transparency and accountability

Source: Lembo et al. (2019, p. 7[7]), Fundamental Principles in PPP Laws: A Review of Latin America and the Caribbean.

4.5.1. Main challenges and constraints

As introduced previously, this note aims at identifying the legal and regulatory barriers inferred through the IDB’s comparative study of Latin-American PPPs laws. From the 14 principles outlined in the report, this note will focus on the ones that, at first glance, seem to present regulatory challenges.

4.5.2. Legal and institutional framework

In all the countries covered by the study, the IDB was able to identify a common understanding of PPPs as mechanisms used to enable the implementation of infrastructure projects to provide a public service thanks to private financing (Lembo et al., 2019, pp. 20-21[7]). However, country definitions depart from that common understanding and vary widely depending on each country’s specific legislation. This can be related to differences in each country’s process to engage private stakeholders (Lembo et al., 2019, p. 18[7]), which in turn can make comparability and transferability of best practices more challenging.

Most countries have a PPP law (Lembo et al., 2019, p. 19[7]). However, an existing law does not guarantee a consolidated legal framework, nor is it a strict pre‑requisites for private investment in infrastructure projects. Thus, having PPP laws does not necessarily mean that PPPs are being implemented, which can reflect inconsistent or lacking legal mechanisms, unstable democratic regimes, and/or a combination of failures in other principles identified by the report.

Institutional frameworks are another mechanism that provide guarantees to private investors to take part in PPP projects. Twelve out of the 17 countries included in the report have a PPP unit in their public administration system and most of them also have a PPP regulatory agency (Lembo et al., 2019, p. 15[7]). When a country does not present a PPP unit, it is not uncommon to find a similar body that oversees infrastructure projects. Such guiding institutions are usually linked to larger governing bodies like the Ministry of Public Works or the Ministry of Finance, and are crucial to prevent project inconsistencies, design and operational inefficiencies, and risks of poor performance or failure. (Lembo et al., 2019, p. 21[7])

4.5.3. Applicable sectors and activities

Most PPPs projects (83%) are implemented in the transport sector (Lembo et al., 2019, p. 15[7]). Like in other areas of the world, this stems from a long-standing tradition of private investment historically devoted to the development of economic infrastructure in the transport sector (roads, railways, seaports, airports, etc.) (Lembo et al., 2019, p. 27[7]) due to its long-term reliability, potential to foster economic development, demographic connectivity, and geographic cohesion.

On the other hand, promotion of PPPs in other sectors in the countries included in the survey is harder to come by. This can be directly related to the transport sector tradition, but also to the regulatory limitations present in some countries regarding PPP implementation in other sectors. Specifically, Costa Rica, El Salvador, Guatemala and Uruguay prohibit PPPs from being developed in certain sectors (Lembo et al., 2019, p. 27[7]).

The IDB report presents a general trend showing that Latin-American and Caribbean Governments are open to PPP implementation and private investment in economic infrastructure, but not in social infrastructure, which in most cases is expected to be provided by the Public Authority (Lembo et al., 2019, p. 27[7]). This self-imposed restriction might be limiting the infrastructural innovation and growth opportunities in the region. As the infrastructure financing landscape shifts to a more sustainable and innovative model, Section 4.9 shows that investment in social infrastructure could be an interesting and worthwhile long-term investment alternative (Asian Development Bank, 2019, p. xxiv[9]).

4.5.4. PPP monitoring and regulation

Regarding PPP project monitoring, the study shows that differences among countries are related to a lack of legal standardisation. Nevertheless, the study also found some common practices across the region (Lembo et al., 2019, pp. 31-32[7]):

• Hiring of independent verifier/auditor to analyse that the project complies with industry standards

• Establishing a supervision management team to advise and monitor the project’s execution

• Reporting from the procuring authority

Despite these common practices, two main monitoring issues stand out in the report (Lembo et al., 2019, p. 33[7]):

• Lack of standardisation of PPP agreement regulation in the region

• Most countries PPP monitoring legislation rarely addressed sector-specific regulations.

4.5.5. Modelling PPP projects

Modelling and procuring infrastructure development through PPP projects is often a better mechanism than traditional procurement because it delivers higher “value for money” to the public entities and better quality infrastructure to the users. (Lembo et al., 2019, p. 36[7]).

Most countries included in the IDB report follow quite similar modelling methodologies, in which they include key steps: Project pipeline, risk allocation, feasibility studies, etc. (Lembo et al., 2019, pp. 36-39[7]). However, the study does not specify to what extent these methodologies might be relatively homogenous across the region. Only feasibility studies – which are fundamental in the structuring and tender phases (Lembo et al., 2019, p. 41[7]) – seems to be present in regulations in all the countries included in the study.

Technical and institutional capacity are important resources for public authorities when tackling a PPP project pipeline, as they contribute to ensuring the suitability of the project and to maximising its profitability, from project preparation to post-delivery operation and maintenance.

Many Latin American and Caribbean countries – especially those where political, institutional, and regulatory regimes can remain relatively unstable – face a lack of technical and institutional capacity that can entail flawed assumptions and predictions, inefficient planning and co‑ordination, and even project failure (Lembo et al., 2019, p. 37[7]).

In these countries, private investment can contribute to compensating the gaps created by institutional and regulatory instability. The IDB study found that most countries have regulations regarding private participation in the modelling process (Lembo et al., 2019, p. 41[7]), especially regarding unsolicited proposals coming from private investors who identify an infrastructure need.

4.5.6. Procuring a PPP project

Procuring infrastructure projects is a complex process which requires the contracting authority to have technical capabilities for evaluation, planning and co‑ordination, and to respect transparency rules that give equal opportunity to bidders (Lembo et al., 2019, pp. 50-51[7]).

The IDB analysis concludes that most laws and regulations related to procurement are specific to each country and cannot be related to common practices adopted at the regional level (Lembo et al., 2019, p. 50[7]). The differences in legislation across the region present certain inconsistencies regarding the presentation and evaluation of proposals: some countries require single envelope proposals, others follow two‑envelope procedures; some countries contemplate two‑phase procedures with a pre‑qualification phase and others do not (Lembo et al., 2019, pp. 51-52[7]). While less constraining at the country level, these inconsistences might create access barriers for international bidders and interested in investing in the region.

All countries included in the study follow a competitive bidding selection process and only a small percentage allow for direct awards (Lembo et al., 2019, p. 51[7]). Although the IDB report has a specific procurement section, the topic is addressed throughout the project definition and preparation phases regarding authority responsibility, procurement mechanisms, and procuring authority reports and monitoring.

Most of the countries considered in the study have sector-related legislation that restricts foreign investment in PPP projects. Even if those legislations are not strictly applicable to infrastructure PPP projects or to project bidders, they may create limitation in a bidding and procurement process (Lembo et al., 2019, p. 49[7]).

4.5.7. Income structure

Like with PPP procurement, income structure in each country depends largely on the country’s legal particularities (Lembo et al., 2019, p. 56[7]). Two model prevail in the region. The difference between them stems from each country’s particular history with private investment and lays essentially in that the first is based on compensation and the second one is based on tariffs (Lembo et al., 2019, p. 57[7]):

• Payment is considered as a periodic payments by the contracting authority to the private entity with or without tariff charge.

• Projects may be self-sustained or co-financed.

Though PPP laws do not usually focus on payment methods, the complexities involved in establishing reliable and transparent payment mechanisms between the administrations and the private partners call for increased attention from stakeholders to ensure that agreements clearly articulate the mechanisms, rights and responsibilities related to the project’s revenue and income structure (Lembo et al., 2019, p. 59[7])

4.5.8. Dispute settlement

Alternative dispute mechanisms are available in most of the countries (Lembo et al., 2019, p. 16[7]). These are non-judiciary conflict resolution procedures that can address both the time sensitivity of public service provision and the complexity of technical issues, and that are increasingly necessary in large PPP projects (Lembo et al., 2019, p. 60[7]).

Though these methods exist in most countries, they vary and are either limited by law depending on the country, or – in some cases – not explicitly addressed in the law but rather outlined in the PPP agreement. The most commonly used methods for conflict resolution are conciliation, mediation, and arbitration mechanisms, which exist in most of the countries included in the study (Lembo et al., 2019, p. 61[7]).

In some cases, however, it is encouraged to solve disputes between the parties involved, in good faith, and through informal conflict resolution methods before resorting to formal arbitration. This is the case of countries like Mexico, Chile, or El Salvador, where technical boards might address technical or economic issues (Lembo et al., 2019, p. 63[7]). Similarly, dispute resolution boards are another mechanism that can contribute to mediation about conflicts regarding contracts and agreements between the parties (Lembo et al., 2019, p. 64[7]).

Though these informal mechanisms are faster, ideally formal legislation is the solution to the potential challenges that the parties could face during the negotiation process, and can contribute to providing more stability for foreign investors (Lembo et al., 2019, p. 63[7])

4.5.9. Financing, funding and guarantees

According to PPP legislation in all the countries included in the study, the private party is responsible for financing the project, and they may use appropriate instruments used commonly in international financial markets (Lembo et al., 2019, p. 76[7]).

The main challenge is the lack of capital market maturity, since it eliminates the project finance option from the public side, though some of the guarantees provided by most of the countries analysed include allowing the private investor to provide project finance (Lembo et al., 2019, p. 78[7]). Some of these guarantees are also provided through insurance mechanisms in the form of single‑purpose funds to guarantee obligations towards the PPP (Lembo et al., 2019, pp. 80-81[7]).

The lack of capital market maturity is a strong barrier for private investment, and governments in Latin-American and the Caribbean are bound to offset that constraint by providing incentives to private partners developing PPPs. Incentives might include loans, grants, capital contributions, and assistance by publicly-owned development banks and financial institutions (Lembo et al., 2019, pp. 78-79[7]).

4.5.10. Risk allocation

The report considers the relevance of risk allocation at country and regional levels, its allocation on both the public and the private side of the investment, and splits it into risk categories relevant to PPP projects (Lembo et al., 2019, p. 95[7]). However, it gives no consideration or very little consideration to the legal barriers that could promote these risks in the countries included in the study. It is also important to note that the risks included in the study are closely related to the life cycle of a PPP rather than to the private investment directly.

4.5.11. Transparency and accountability

All countries except Trinidad and Tobago have regulation regarding transparency and accountability in general, even if specific PPP regulations might not address these topics directly (Lembo et al., 2019, p. 109[7]). Despite having basic legal frameworks in these regards, however, most of the countries covered in the report have recently presented corruption-related scandals linked to infrastructure projects, so transparency and accountability remain areas of concern and constraints to foreign investment in infrastructure.

4.5.12. Preliminary areas of barriers

Table 4.4. Preliminary areas of legal, regulatory and procedural barriers in Latin America and Caribbeans Based on the full barrier classification table in Annex 4.A, the following barriers correspond to the current investment landscape in the Latin America and Caribbean. The areas below do not represent an assessment of barriers, but areas that have been generally identified as requiring more attention

 

Denotes areas that are not legal, regulatory or procedural concerns
INVESTMENT SIDE (regulatory factors that shape the attractiveness of infrastructure for investors)
Essential security interests (can be derived by either national security or economic protectionism concerns)
Assessment criteria, procedural rules and responsibilities (referred to here as 1st generation mechanisms), comprehensive rule‑sets (referred to here as 2nd generation, mechanisms) and a risk-roster that sets out which transactions are potentially injurious to essential security interests and thus subject to review or restrictions
SOEs, link to foreign government screening or security interests
Corruption risk high
Financial related
Appropriate risk mitigation tools not available
Credit rating score low or unavailable
Corporate reporting regime weak– Disclosure regime insufficient or not transparent
Insurance coverage availability or premium being too high
	Political risk insurance
	Property insurance
	Other insurance
Risk factors
Regulatory risks
	Uncertainty of regulation
	Complexity/lack of coherence of regulatory standards across jurisdictions/sectors
Inadequate ESG framework for investors
	Insufficient/non-standardised environmental considerations
	Insufficient/non-standardised social considerations
	Insufficient/non-standardised governance considerations
Insufficient data available for risk analysis
	Financial data related reporting
	Non-Financial reporting
Political risks
Sectoral regulation
Sector regulation does not provide the right mix incentives (i.e. risk sharing, efficiency, investment)
Lack of stability and predictability of regulatory regime
PPP and project finance frameworks
Lack of a supportive framework for project finance (e.g. ability to pledge receivables as collateral to loans)
Procurement regulations
Lack of stability and predictability of regulatory regime
An effective complaints system is missing (e.g. transparency, agility, independence)
Lack of a supportive framework for integrating social, environmental and macroeconomic aspects into the entire procurement process (e.g. from needs assessment to contract execution)
Dispute resolution mechanisms
FINANCING (including regulatory aspects that shape the supply of capital for infrastructure)
Reporting requirement related
	Difficult to report on required climate risk related (if any requirements exist)
	Difficult to report on required SDG related (if any requirements exist)
	Difficult/challenging to report on ESG-related (if any requirements exist)
	Complexity/multitude of standards, which may make compliance cumbersome
Sectoral regulation
Capital market regulation
Limited availability of capital market instruments for unlisted equity
Limited availability of debt capital market instruments
Risk considerations
Insufficient applicable ESG considerations
	Regulatory requirements for environmental considerations
	Regulatory requirements for social considerations
	Regulatory requirements for governance considerations
Any others

4.6. Asia

Finding comprehensive and current data from Asia as a region is more challenging. This section is based on input from Korea’s ExIm Bank, the JBIC, and an Asian Development Bank (ADB) report focusing on Public-Private Partnerships (PPPs) in 12 ADB developing member countries (DMCs).

The different responses provide specific information about regulatory barriers in the following 14 countries in the region: Bangladesh, China, Georgia, India, Indonesia, Kazakhstan, Malaysia, Pakistan, Papua New Guinea (PNG), Philippines, Sri Lanka, Thailand, Turkey, and Viet Nam.

Overall, the report evaluates PPPs in Asia to be at the “developing level with two exceptions: In the Philippines, PPPs already operate in a developed framework, whereas in PNG they are still at the emerging level (Asian Development Bank, 2019, p. 14[9]).

Though the ADB report only covers two decades until 2017, it is the most complete source reviewed and can provide an understanding of the infrastructure and PPP landscape in the region before the pandemic. The PPP Monitor report is more granular, split both at country and sector level, then among four different areas of analysis. Most investment barriers and system deficiencies are common in the countries marked in red.

The few responses received lead to the conclusion that overall regional regulatory barriers for the development of quality infrastructure are present in the investing side of the process, rather than the financing side. Out all the inputs received, only one regulation – the Foreign Private Investment Protection and Promotion Act 1980 of Bangladesh – presented challenges on the financing side.

4.6.1. Main challenges and constraints

Barriers in the 11 Asian countries surveyed by the ADB are divided into two segments: the regulatory and institutional frameworks that allow or prevent PPPs from settling and thriving; and PPP market and financial systems maturity to enable the execution of these projects.

4.6.2. Institutional and regulatory frameworks

Five out of the 12 DMCs surveyed in the PPP Monitor reported progress in their regulatory frameworks in 2017. Specifically, Georgia and Pakistan passed PPP laws aimed at improving the regulatory environment to facilitate these initiatives. However, several common barriers are still relevant for most countries reflected in the report:

• Delays in land acquisition processes

• Undeveloped lender security rights

• Undeveloped treatment of termination and compensation events

• Limited government support measures (public funding) packages

• Insufficient guidance and regulation for SOEs participation

• Foreign ownership restrictions

• Lack of standardised PPP contract provisions

• Lack of PPP selection, prioritisation and pipeline development methodologies

• Unbalanced risk allocation

In some countries, regulatory frameworks to allow PPP implementation such as Indonesia’s Law No. 64/2020/QH4,5 and to provide sector-related incentives like Viet Nam’s Law No. 48 of 2017 regarding the energy sector6 or Turkey’s renewable energy feed-in tariff7 are still lacking or too restrictive to enable quality infrastructure investment in the region.

Other respondents also identified specific regulations posing barriers related to security interest and ownership (Malaysia’s Large Scale Solar Photovoltaic Bidding8 and Indonesia’s Presidential Regulation No. 4 of 2016 for Indonesian SOEs9), currency convertibility, and land use and acquisition (Bangladesh’s Foreign Private Investment Protection and Promotion Act 1980).

Institutional capacity for implementation only appears to be fully developed in Bangladesh and the Philippines. One of the many problems referred by most were the constraints to institutional capacity resulting from high public official turnover. Nevertheless, most countries in the group have a PPP-monitoring government agency and have published pipeline of potential PPP projects. In general, responses show that ADB member countries are committed to working on regulatory framework improvements through the revision of existing regulations and introduction in new supporting ones to enable PPP implementation (Asian Development Bank, 2019, p. xxii[9]).

4.7. PPP market and financial systems maturity

The most stable of these aspects are the financial facilities in place to implement PPP projects. Almost all MDCs mentioned in the report have sound financial systems where hedging products and currency convertibility are available for PPP projects (Asian Development Bank, 2019, p. xxiv[9]). On the other hand, the PPP market itself is not as mature as the financial market.

Most PPP projects finalised in 2017 were located in the most developed economies, namely China, India, and Bangladesh. This volume accounted for 76 of the 110 projects under way in 2017, or 69% of projects (Asian Development Bank, 2019, p. xxiii[9]). In parallel, 59% of those PPP projects were executed in the energy sector, the most mature in the region and the one where PPPs implementation rules are most standardised: agreements on power purchase and risk profile are easier to reach, and governments allocate more guarantees (Asian Development Bank, 2019, p. xxiii[9]).

However, other sectors where PPPs implementation was successful are less developed and face more challenges and constraints that governments are still reluctant to address. In the transport and road sector, for example, some barriers include traffic and revenue risk/demand uncertainty and land acquisition constraints.

4.8. ESG compliance requirements

Looking ahead, an increased interest in social infrastructure can become an alternative avenue to unlock PPPs implementation regulation in these countries. Social infrastructure has not always been considered as being an infrastructure asset, but there has been increasing recognition that social infrastructure, which includes education, health, public order, and culture and recreational infrastructure, are also important infrastructure assets. The social benefit of these infrastructures could contribute to sustainable infrastructure and thus be of interest to investors. These infrastructure projects have proven to be as successful for private investors as traditional infrastructure projects, yet they are subject to fewer of the regulatory constraints cited above and have a lower risk profile (Asian Development Bank, 2019, p. xxiv[9]).

4.8.1. Preliminary areas of barriers

Based on the table in Annex 4.A, the following barriers correspond to the current investment landscape in the Asia.10 The areas below do not represent an assessment of barriers, but areas that have been generally identified as requiring more attention.

Table 4.5. Legal, regulatory and procedural barriers in Asia

Denotes areas that are not legal, regulatory or procedural concerns
INVESTMENT SIDE (regulatory factors that shape the attractiveness of infrastructure for investors)
Essential security interests (can be derived by either national security or economic protectionism concerns)
Attention to acquisition- and ownership-related policies
	Majority foreign ownership control
Assessment criteria (undeveloped security rights and treatment of termination)
SOEs, link to foreign government screening or security interest
Financial related
Currency inconvertibility
Risk factors
Uncertainty of regulation
Complexity/lack of coherence of regulatory standards across jurisdictions/sectors
Applicable ESG considerations in regulation
Insufficient data for risk analysis
Land use and planning regulations
Difficulty of acquiring land (foreign ownership restrictions)
Sectoral regulation
Sector regulation does not provide the right mix incentives (i.e. risk sharing, efficiency, investment)
PPP and project finance frameworks
Lack of supportive framework for PPPs and concessions lacking
Lack of lender step-in rights
Procurement regulations
Lack of stability and predictability of regulatory regime
Lack of supportive framework for effective tendering and contract management
FINANCING SIDE (including regulatory aspects that shape the supply of capital for infrastructure)
Currency/capital controls (e.g. Repatriation of profits)
Restrictions on direct or ownership of unlisted companies

4.9. Considerations and next steps

As demonstrated by this preliminary note, further developing this note could bring important insights into areas that could be addressed to support private financing into infrastructure projects. The note already identifies a number of areas that could be improved, as well as providing ideas as to how these areas could be reformed.

The findings make clear that there are identifiable areas which are barriers to investment, but which may not necessarily be legal and regulatory in nature. The table of classification of barriers (Annex 4.A) provides a starting point for clarifying which barriers could be hampering investments, and what actions could be taken to address them.

At first glance, the following barriers represent the most commonly mentioned areas of concern for investors and development agencies across the pool of responses received:

• Lack of sufficiently supportive regulatory frameworks, related to both PPP implementation and sectoral regulation

• Insufficient or unavailable risk analysis and mitigation tools, especially those related to regulatory regimes and political uncertainty, as well as to lack of capital market maturity.

• In developed economies in EU, and Germany specifically, capital and solvency regulations are areas of concern due to the restrictions and quotas set by the EU Solvency Capital Requirements (SCR) under the Solvency I and II directives.

• Lack of clear and homogenous ESG regulatory and reporting frameworks and ESG-related risk analysis and mitigation tools for investors.

However, to strengthen the observations and to develop the report to cover more regions, greater input is necessary. Delegates are thus invited to inform the Secretariat of reports or areas that could be added to ensure that the report can be more fully developed.

Once the report has been fully developed, the Secretariat expects that a second phase of the project could examine best practices and seeking ways in which the barriers could be addressed in the context of quality infrastructure investment.

Annex 4.A. Table of classification of legal, regulatory and procedural barriers to quality infrastructure investments

Annex Table 4.A.1.  Classification of legal, regulatory and procedural barriers to quality infrastructure investments

Denotes areas that are not legal, regulatory or procedural concerns
INVESTMENT SIDE (regulatory factors that shape the attractiveness of infrastructure for investors)
Essential security interests (can be derived by either national security or economic protectionism concerns)
Attention to acquisition- and ownership-related policies
	Majority foreign ownership control
	Impeding full foreign ownership
Investment screening
	Health sector or infrastructure
	Technology sector or infrastructure
	Real estate, border areas (sensitive areas)
	Critical infrastructure
	Biotechnologies
	Energy sector
	Transport
	Education
	Telecoms
	Waste treatment
	Water treatment
Assessment criteria, procedural rules and responsibilities (referred to here as 1st generation mechanisms), comprehensive rule‑sets (referred to here as 2nd generation, mechanisms) and a risk-roster that sets out which transactions are potentially injurious to essential security interests and thus subject to review or restrictions
SOEs, link to foreign government screening or security interests
Corruption risk high
Geopolitical risk high
Trade agreement related
Non-membership of certain trade agreement have lower ownership threshold
Financial related
Appropriate risk mitigation tools not available
IRR not sufficiently high
Debt-Service Coverage Ratio (DSCR) (cash flow) estimates poor or low
Tax rate
Limited hedging instruments available
Currency inconvertibility
Credit rating score low or unavailable
Corporate reporting regime weak– Disclosure regime insufficient or not transparent
Contract enforcement weak– enforcement or court system weak
Insolvency regime weak
Insurance coverage availability or premium being too high
	Political risk insurance
	Property insurance
	Other insurance
Risk factors
Regulatory risks
	Approval process too costly
	Approval standard too high
	Approval standard too lax
	Schedule too long
	Compliance with ongoing regulation–Too onerous and costly to perform
	Uncertainty of regulation
	Complexity/lack of coherence of regulatory standards across jurisdictions/sectors
Applicable ESG considerations in regulation
	Regulatory requirements for environmental considerations
	Regulatory requirements for social considerations
	Regulatory requirements for governance considerations
Inadequate ESG framework for investors
	Insufficient/non-standardised environmental considerations
	Insufficient/non-standardised social considerations
	Insufficient/non-standardised governance considerations
Insufficient SDG consideration for investors
	Insufficient EMDE coverage
Poor resilience considerations
	Climate change‑physical risk
	Climate change‑transition risk
	Cyber risk
	Social risks
Insufficient data available for risk analysis
	Financial data related reporting
	Non-Financial reporting
Risk considered to be too high
Political risks
Land use and planning regulations
Lack of clarity over land ownership
Difficulty of acquiring land rights
Incoherent planning regulations and procedures
Sectoral regulation
Sector regulation does not provide the right mix incentives (i.e. risk sharing, efficiency, investment)
Lack of stability and predictability of regulatory regime
Sector regulation does not provide the right mix incentives (i.e. risk sharing, efficiency, investment)
PPP and project finance frameworks
Lack of a supportive framework for PPPs and concessions lacking
Lack of a supportive framework for project finance (e.g. ability to pledge receivables as collateral to loans)
Lack of lender step-in rights
Procurement regulations
Lack of stability and predictability of regulatory regime
Lack of a supportive framework for effective tendering and contract management (e.g. open and competitive procedures, access of international bidders)
An effective complaints system is missing (e.g. transparency, agility, independence)
Lack of a supportive framework for integrating social, environmental and macroeconomic aspects into the entire procurement process (e.g. from needs assessment to contract execution)
Dispute resolution mechanisms
International arbitration not allowed for foreign investors
FINANCING (including regulatory aspects that shape the supply of capital for infrastructure)
Capital regulation/Solvency regulation
Quantitative investment regulation
Restrictions on direct or ownership of unlisted companies
Reporting requirement related
	Difficult to report on required climate risk related (if any requirements exist)
	Difficult to report on required SDG related (if any requirements exist)
	Difficult/challenging to report on ESG-related (if any requirements exist)
	Complexity/multitude of standards, which may make compliance cumbersome
Sectoral regulation
Currency/capital controls (e.g. Repatriation of profits)
Prudential regulation
Quantitative restrictions for pension fund investments
Liquidity ratios for banks challenging
High capital charges
Capital market regulation
Limited availability of capital market instruments for unlisted equity
Limited availability of debt capital market instruments
Restrictions on private placement of infrastructure debt
Risk considerations
Insufficient applicable ESG considerations
	Regulatory requirements for environmental considerations
	Regulatory requirements for social considerations
	Regulatory requirements for governance considerations
Any others

Annex 4.B. Latin America and Caribbean

Annex Table 4.B.1.  PPPs enabling laws, 17 countries

Data collected in 2018

Country	Law	Country	Law
Brazil	Law 11 079/2004 Law 8 987/1995 Law 8 666/93 Decree 8 428/2015 Law 12 527/2011	Mexico	Constitution PPP Law + Rules Applicable Rules for PPPs Fed. Budget + Tax Code Law of National Assets
Colombia	Law 1 508/2002 Law 80/1993 Law 1 150/2007 Decree 1 082 of 2015 Law 1882/2018	Nicaragua	Law 935/2016 Decree 05/2017
Costa Rica	Law 7 762/98 Decree 27 098‑MOPT Decree 31 836‑MOPT Executive decree 39 965	Panama	Law 22/2006 Law 5/1988
Ecuador	Lew orgánica (PPP Law) Decree 810 Decree 582 Decree 1 040 Ley orgánica – Ley 1 Executive decree 1 700 Resolution n. CIAPP-R‑009‑Abril‑2017	Paraguay	Law 5 102 (PPP Law) Decree 1 350 Law 1 618 Law 2051/03
El Salvador	Decree 379/2013	Peru	Decree 1 362 (PPP Law) Supreme Decree 240‑2018‑EF
Guatemala	Decree 16/2010 Acuerdo Gubernativo 360/2011	Trinidad and Tobago	Act N. 1/2015 PPP Policy Draft
Honduras	Decree 143/2010 Acuerdo Ejecutivo 02073/2010 Decree 58/2010 Decree 24‑2012 Decree 73‑2010 Decree 51‑2011	Uruguay	Law 18 786 Decree 17/2012 Decree 280/2012 Decree 251/2015
Jamaica	Institutional Framework for Implementation of PPPs

Note: Only Mexico and Peru have more recently updated their PPP legislation, in 2019.

References

[9] Asian Development Bank (2019), Public-Private Partnership Monitor, Second Edition, Asian Development Bank, Manila, Philippines, https://doi.org/10.22617/TCS190020-2.

[5] Delanote, J., A. Kolev and I. Rizzoli (2021), EIB Investment Survey Country Overview: USA, European Investment Bank, https://doi.org/10.2867/91057.

[4] Delanote, J. et al. (2021), How policymakers can support EU cohesion in the post-pandemic environment, Europpblog, https://blogs.lse.ac.uk/europpblog/2021/07/22/how-policymakers-can-support-eu-cohesion-in-the-post-pandemic-environment/ (accessed on 15 April 2022).

[1] Delanote, J. and I. Rizzoli (2021), EIB Investment Survey 2021 European Union Overview, European Investment Bank, https://www.eib.org/attachments/publications/eibis_2021_european_union_en.pdf (accessed on 15 April 2022).

[6] Ferreira, E. (2021), Three milestones for inclusive recovery, pp. 6-7, https://territoriall.espon.eu/magazine/reader/220588 (accessed on 22 April 2022).

[8] Global Infrastructure Hub (2021), Infrastructure Monitor 2021.

[7] Lembo, C. et al. (2019), Fundamental Principles in PPP Laws: A Review of Latin America and the Caribbean.

[2] McGoldrick, P. and M. Debs (2021), The state of local infrastructure investment in Europe: EIB Municipalities Survey 2020, European Investment Bank, https://www.eib.org/attachments/efs/eibis_2020_municipality_en.pdf (accessed on 15 April 2022).

[3] McGoldrick, P. and D. Revoltella (2021), EU municipalities and the twin challenge of digitalisation and climate change, pp. 20-21, https://territoriall.espon.eu/magazine/reader/220588 (accessed on 22 April 2022).

Notes

← 1.  Other responses received were not used at this juncture, given the limited scope of this preliminary note. The OECD hopes to receive more inputs to inform the situation in their respective regions.

← 2.  Lines marked with one asterisk (*) in the table correspond to specific information found in the EIB Investment Surveys; Lines marked with two asterisks (**) correspond to information reported by Cassa Depositi e Prestiti (CDP) in Italy.

← 3.  Lines marked with one asterisk (*) in the table correspond to specific information found in the EIB Investment Surveys; Lines marked with two asterisks (**) correspond to information reported by Cassa Depositi e Prestiti (CDP) in Italy.

← 4.  In the context of the IDB report, PPPs are defined as “long-term infrastructure projects that bundle the implementation and the operation phases of the project, alongside investment made by the private party with financing structures” (Lembo et al., 2019, p. 14[7]).

← 5.  Coverage of a supportive PPP framework is too narrow to cover most of gas-fired project bankability, coverage of the existing PPP framework should be widened.

← 6.  MEMR No. 48 2017 restricts share transfer prior to the Commercial Operation Date (COD).

← 7.  The FIT levels applied to renewable energy projects in Turkey would reflect the level of subsidies available for domestic equipment. Therefore, the FIT levels would not be appropriate foreign investors.

← 8.  a) Locally incorporated companies that are 100% owned by Malaysians or b) companies that are listed on the local stock exchange and that at least 75% of share are held by Malaysians are able to participate in the bidding.

← 9.  The Regulation requires that PLN (Indonesia SOE) subsidiary holds at least 51% share of IPP.

← 10.  Lines marked with one asterisk (*) in the table correspond to specific information found in the EIB Investment Surveys; Lines marked with two asterisks (**) correspond to information reported by Cassa Depositi e Prestiti (CDP) in Italy.