To complete – than planners anticipate. One solution is to bring in private financing only after a project is completed.

procurement, and construction (EPC), and a longer phase of operation when toll revenue is collected to recover incurred costs and expected returns.

There are plenty of uncertainties in both phases, but especially during EPC, which may last 3-7 years, depending on the project. Given the risks in this phase, capital markets demand that it be financed with more equity than debt and have an expected internal rate of return that often reaches 18% or higher. When construction is completed and the road put into operation, the lower risks and stable cash flows allow for more debt financing by a different set of more conservative investors, such as pension funds, which expect returns of 5-7%, allowing the initial investors to cash out.

So, the project involves quite sophisticated financial engineering. Almost always, such plans cannot be realised unless the government provides guarantees against geological or traffic risks. Negotiating such agreements often adds four years to the project – to get to the so-called financial closing – before any physical work is done. In addition, there are so many details to be negotiated and supervised that opportunities for malfeasance by government officials abound.

This means that neither the incentive/corruption problems nor the budget/public-debt problems that the second pianist was supposed to eliminate actually go away. It also means that there are good reasons why privately financed projects become significantly more expensive, given the higher cost of capital, and why completing them can be much, much slower. Moreover, the second pianist does not do away with the need for a capable and honest state, able to design and manage such complex projects. But this may not be the best way to deploy government capacity.

An alternative is to concentrate the role of the private sector in the latter phases of the project. The best option may be for the government to build the road and sell the concession for operation and maintenance. This allows the government to cash out and reinvest the resources in pre-investment and EPC, thus recycling scarce public capital more quickly while cutting out the most expensive and slowest parts of private involvement.

For other projects, such as the development of major tourism areas, the government must incur significant preinvestment and public infrastructure costs if it is to make them bankable. Recovering these costs would require participating in the project or co-investing with the private sector through some financial vehicle that also manages the project on behalf of the government.

This requires institutional capabilities that many countries do not have and that the development community has not fostered. But these capabilities could make a very large difference. That is why Albania’s government, with the help of Harvard’s Center for International Development (which I direct), is planning to create the necessary investment vehicle. Given the stakes, the many challenges and difficulties ahead will be worth it. As the pianists would say: Stay tuned!