Roads seem to be the archetypical example of an infrastructure that should be provided by public intervention: even Adam Smith, in hisInquiryinto the Nature and Causes of the Wealth of Nations, conceded that government intervention is needed to supply goods and services characterized by collective benefits, and roads are one of his examples. However, private roads have been financed by tolls charged to road users throughout history, and they still are nowadays.


In the nineteenth century private operators had a major role in providing railroad, motorway – and in some countries even road - network connecting cities and citizens, thus enabling exchanges and economic growth, as well as labour and leisure mobility1.


Quite interestingly, in Italy a private operator pioneered, in the 20s, the construction of the first road network exclusively reserved to motor vehicles. Only in the 60s the government became heavily involved in road constructions and development, monopolizing the sector. Throughout this time, the level of investment in the motorway system became strictly determined not by efficiency goals, but by financial ability of the Italian government, and its political plan. As a consequence in the mid-70s investments in the national motorways were left behind, with minimal investment until a new phase after the 90s, when the sector was opened to privates again2.


Building a complex infrastructure is a challenging business: it requires high investments, and the ability to better select the combination of technologies and inputs in order to achieve the most effective results, in a situation where none of the productive decision is fixed, and there is structural uncertainty on the market response as well. Infrastructural investments require the assessment of technical, construction, financial and management risks3. Yet taking risky decisions in an uncertain environment is exactly the entrepreneurial function4, while being the driving force of innovation in the modern world:“The success which capitalist market economies display is the result of a powerful tendency for less efficient, less imaginative courses of action, to be replaced by newly discovered, superior ways of serving consumers—by producing better goods and/ or by taking advantage of hitherto unknown, but available, sources of resource supply.”5


Understanding the role of uncertainty and risk is fundamental to appreciate the role of private entrepreneurs in the marketplace, and the role of government to build an environment where the decisions about uncertain future and risky environments are taken. There are two main reasons why private entrepreneurs are better suited than regulators in doing this assessment. First, regulators lie in the weaker sport of a knowledge asymmetry setting: operators have better technological knowledge, better know-how of their own business. Second, economic actors have better incentives to be accurate in the predictions about future outcomes of present investments if they pay the consequences of wasteful economic choices. Public intervention tries to mimic the waste-minimizing mechanism of profit and loss through regulatory requirements such as impact assessment and cost-benefit analysis, but this is not always effective, especially not in the infrastructure industry, where the misalignment betweenex anteand actual costs and benefits is too systematic and striking to be considered casual.


For instance, in Italy, the Brescia-Milano interconnection toll road was planned in 2001 as an € 870 million project-financing initiative, but then became a project accounting to more than € 1.6 billion (and counting), and mostly publicly funded or guaranteed6.


Even though the high level of red tape and intricacies of the authorization framework plays a peculiar role in increasing building costs in Italy, this is not just another of many Italian anomalies. Probably the most uproarious example of such a phenomenon is the reconstruction of San Francisco’s Bay Bridge: in 1995 the project was initiated with an estimate cost of 250 millions of dollars, in order to be concluded in 2013 with a total cost of 6.5 billion of dollars, with more than +2300 appreciations at current prices7.


The most extensive survey8on concessions and economic prediction accuracy covers 258 infrastructural projects across 20 nations of the 5 continents, and shows that on average less than one project out of ten is completed respecting the initial budget. At constant prices, the average gap between planned and actual budget is about 44.7% for railroad or metropolitan trains, 33.8% for tunnels and bridges, and 20.4% for roads and motorways.


Standard & Poor’s assessed that the expected benefits are systematically overestimated too when the appraisal is carried through by public actors – with a margin of error of 34%, almost twice the error (18%) resulting from estimate by banks and private investors9.


Indeed, errors are a natural part of any assessment made in a condition of uncertainty, but the incentive structure has a significant impact in shaping the outcomes. The profit-loss test forces private actors, who invest their own money, to focus on cost-efficient investments and find better information to forecast future profits. On the other hand, public investors do not have such a test, and people in charge of making administrative decisions about funding allocations – i.e. politicians – have higher incentives to approve and complete a public work than to assess their long term cost-effectiveness for the community. Political success is defined by “doing infrastructure”, even unnecessary ones, and by a ribbon-cutting ceremony, regardless of the effective use of the infrastructure10. This is due to what public choice literature define asShortsightedness Effect, a bias that negatively affects policy makers assessing long term costs and makes them more prone to adopt measures which yield an immediate political reward in terms of popular support11.


A research by Allen Consulting Group highlights how private participation can mitigate this problem: after analyzing the gap in terms of cost and time for 54 Australian infrastructural projects, those made with public private partnership had, respectively 13.9% and 17.6% of cost and time misalignment. Correspondingly, public project resulted in 44.7% cost and 24.3% time misalignment.


Technical and economic uncertainty in the infrastructure business, as well as adverse political incentives, make private more apt to assess risk in any complex, long-term, capital intensive sector. But on the top of that “normal” market risk, an unstable regulatory environment places a regulatory risk: the risks of return on long-term investments to be curtailed by unilateral and frequent changes in regulation. If the role of private actors is that of selecting the technological and business combination that lowers market risk, the role of public actors should be that of lowering regulatory risk. It might seem a minimal intervention, but crafting effective policy design and implement them requires effective research, political courage and statecraft: it is not an easy task to accomplish.


While risk assessment plays an important part in economic decisions about infrastructure, and as such a higher level of risk will be automatically translated in higher returns, and higher tolls. Literature and history show how governments are not good risk appraisers, because of negative incentives and information asymmetry. Accordingly, it is important to devise a policy design that can reap the most information from economic actors to be regulated, and such a system is a competitive procedure for granting a concession – “a moment of price discovery”, which allows to establish the price of a large and multifaceted array of operations – e.g. planning, contracting, implementing, managing – which are required to build a motorway or a railroad12.


Also, by adding a political and a regulatory layer to the economic risk, this framework negatively affects the infrastructural industry, which is capital intensive and where yield curves are long and investment recovery is distant in time. Reducing regulatory risk should be a primary target in policy design if we are to increase the quality of investments, allowing a more accurate economic calculation and the creation of effective financial plans. But the highway to a more effective relationship between public and private actor passes through a higher level of competition. A more transparent and contestable market will benefit not only public finance and consumers, by awarding concessions to the most efficient operators, but also the operators itself, whose business planning wouldn’t be considered a regulatory project subject to periodical review. If concessions are not considered as ironclad, risk will be higher than what is considered acceptable, and return rates required for investment will be higher. But the only way to stabilize tolls to an appropriate rate of return – thus rewarding economic risk, rather than a political one – is higher legitimacy to the way concessions are granted, which can only occur as a result of a competitive contest.


As long as the relationship between private operators and public authorities will be opaque, concessions will be prone to be unilaterally modified. Closer to a public act than to a private contract, they will increase the uncertainty about time, tolls, interventions, and this increased regulatory risk will pass through the operators to the consumer, with higher prices and less investments.



1Brealey, R.A., Cooper, I.A., Habib, M.A. “Using Project Finance to Fund Infrastructure Investments” inJournal of Applied Corporate Finance, 9(3), 1996, 24-38.

2Stagnaro, C., “Introduzione” in Stagnaro, C. (ed.)Rapporto sulle Infrastrutture in Italia - Le infrastrutture autostradali, IBL libri, Torino, 2010

3Giuricin, A., “L’attività regolatoria: come aiutare lo sviluppo del sistema autostradale” in Stagnaro, C. (ed.)Rapporto sulle Infrastrutture in Italia - Le infrastrutture autostradali, IBL libri, Torino, 2010

4Knight, F.Risk, Uncertainty and Profit, Houghton Mifflin, Boston 1921

5Kirzner, I.How Markets Work: Disequilibrium, Entrepreneurship and Discovery, Institute of Economic Affairs, London 1997.

6Ramella, F., “Infrastrutture: privatizzare i profitti ma anche le perdite. BRE-BE-MI e le altre “grandi opere”,IBL focus n. 265, maggio 2016

7Trapenberg, F. K.,Remaking the San Francisco–Oakland Bay Bridge. A Case of Shadowboxing with Nature, Routledge, Abingdon (UK). 2016

8Flyvbjerg, B., Bruzelius, N., Rothengatter, W.,Megaprojects and Risk: An Anatomy of Ambition, Cambridge University Press, Cambridge (UK), 2003.

9Standard & Poor’s, “Traffic Risk in Start-up Tool Facilities”, inStandard & Poor’s Infrastructure Finance, September 2002.

10Ramella, F., “Infrastrutture: privato è meglio” in Stagnaro, C. (ed.)Rapporto sulle Infrastrutture in Italia - Le infrastrutture autostradali, IBL libri, Torino, 2010

11Gwartney, J. D., Stroup, R.,Economics, private and public choice. 2d ed. Academic Press, New York, 1980.

12Ramella, F., “Infrastrutture: privato è meglio” in Stagnaro, C. (ed.)Rapporto sulle Infrastrutture in Italia - Le infrastrutture autostradali, IBL libri, Torino, 2010





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