Return to Equity, Financial Structure, and Risk Contracting in Infrastructure Projects

Infrastructure projects, with private participation, worth several hundred billions of dollars, using some form of ‘project finance’ are under consideration in many emerging markets. These projects are made bankable by extensive risk contracting. One stumbling block in finalizing these projects is the question of appropriate return to equity investment. This paper by Sidharth Sinha discusses the relationship between risk contracting arrangements and the return to equity and financial structure. The main conclusion that emerges is the need for competitive bidding in the absence of an equity market for ‘infrastructure type projects.’ Governments can help reduce the risk and required return on equity investment by creating the appropriate legal and regulatory framework for reducing delays and uncertainties in finalizing and implementing these projects.