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Private Finance of Public Infrastructure

Author

Listed:
  • Eduardo Engel

    (Department of Economics, University of Chile, Santiago, Chile)

  • Ronald Fischer

    (Department of Industrial Engineering, University of Chile, Santiago, Chile)

  • Alexander Galetovic

    (Escuela de Gobierno, Universidad Adolfo Ibáñez, Santiago, Chile)

Abstract

Public-private partnerships (PPPs) have emerged as an organizational form to provide public infrastructure. A key characteristic of PPPs is that private investors participate directly in individual infrastructure projects. The advantage of private finance is that it may improve incentives. However, private finance typically neither frees public funds nor enlarges the pool of viable projects.Private finance improves risk allocation if exogenous demand risk is assigned to the public, while endogenous risks are assigned to the private parties (PPPs and financiers), which provides strong incentives for efficiency. When funding for the project relies on user fees, variable term contracts can allocate risks efficiently, in contrast to allocation under fixed term contracts.The exploration of alternative financial contracts that allocate endogenous risks to private parties and determination of the optimal allocation of these risks among borrowers and lenders are potentially fruitful areas for future research. This line of research is probably relevant beyond infrastructure finance.

Suggested Citation

  • Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2022. "Private Finance of Public Infrastructure," Annual Review of Financial Economics, Annual Reviews, vol. 14(1), pages 319-335, November.
  • Handle: RePEc:anr:refeco:v:14:y:2022:p:319-335
    DOI: 10.1146/annurev-financial-111620-113307
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    Keywords

    concessions; infrastructure finance; P3; PPPs; public-private partnerships; risk allocation;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets

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