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Annual Review of Financial Economics

Volume 14, 2022

Private Finance of Public Infrastructure

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.

Keyword(s): concessions, infrastructure finance, JEL G28, JEL G38, JEL H44, P3, PPPs, public-private partnerships, risk allocation
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2022-11-01
2024-04-29
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/content/journals/10.1146/annurev-financial-111620-113307
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Private Finance of Public Infrastructure
Annual Review of Financial Economics 14, 319 (2022); https://doi.org/10.1146/annurev-financial-111620-113307
/content/journals/10.1146/annurev-financial-111620-113307
/content/journals/10.1146/annurev-financial-111620-113307
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