Private Finance of Public Infrastructure

Eduardo Engel, Ronald Fischer and Alexander Galetovic
Additional contact information
Ronald Fischer: Department of Industrial Engineering, University of Chile, Santiago, Chile
Alexander Galetovic: Escuela de Gobierno, Universidad Adolfo Ibáñez, Santiago, Chile

Annual Review of Financial Economics, 2022, vol. 14, issue 1, 319-335

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.

Keywords: concessions; infrastructure finance; P3; PPPs; public-private partnerships; risk allocation (search for similar items in EconPapers)
JEL-codes: G28 G38 H44 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1146/annurev-financial-111620-113307

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