Private Finance of Public Infrastructure

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.