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Private Finance of Public Infrastructure

Author

Listed:
  • Eduardo Engel
  • Ronald Fischer
  • Alexander Galetivoc

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 (PPP 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 fixed term contracts. A potentially fruitful area for future research is to explore alternative financial contracts that allocate endogenous risks to private parties, and determine the optimal allocation of these risks among borrowers and lenders. This line of research is probably relevant beyond infrastructure finance. Key words: Infrastructure finance,P3,Risk allocation.

Suggested Citation

  • Eduardo Engel & Ronald Fischer & Alexander Galetivoc, 2022. "Private Finance of Public Infrastructure," Documentos de Trabajo 351, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:351
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    Keywords

    infrastructure finance; p3; 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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