Considering Infrastructure Finance

Given infrastructure’s integral role in enabling high-functioning economies around the world and the concern that the pace of investment is not keeping up with the need for it, I have recently begun to focus my research on the consequences of different approaches to financing such projects. Infrastructure includes both physical facilities and intangible undertakings like services or scientific enterprise. To ensure governments (and indirectly their citizens) are making economically and fiscally sound infrastructure investment decisions, it is critical that the public officials thoroughly understand the implications of alternative financing approaches used for infrastructure projects and are able to price, allocate and manage risks effectively.

Historically, infrastructure initiatives have been financed by regional or national governments using current tax revenues or through issuing government debt. An alternative way for governments to raise capital is by entering into public-private partnerships (P3s), which share varying degrees of responsibility for funding, risk-bearing and project management with the private sector. Whereas traditional project finance utilizes private funding to pay for infrastructure development, recent P3s often place more emphasis on risk-sharing arrangements. A common structure is to create a special purpose vehicle (SPV) that combines debt and equity from private sources, often with high leverage. Governments sometimes absorb part of the risk, for example by guaranteeing the debt. Additional methods to support infrastructure investment include tax credits and the use of infrastructure banks, which already exist in some countries and regions.

There are numerous different kinds of physical development infrastructure, including roads, bridges, rails, transport, ports, airports, canals, dams, parking, hospitals, schools, parks, utilities (electricity, water, sewage, gas), waste, telecommunication and broadband. They can vary substantially in characteristics and requirements. However, one main element all projects share that makes them candidates for P3s is high upfront cost with long-term utility and uncertain revenue streams distributed over time.

Research initiatives on infrastructure finance and P3s in particular should address key questions such as the following.

  • What characteristics define a specific infrastructure project and its financing needs?
  • Which means of financing are available and how costly are they in comparison?
  • On which factors does the successful financial execution of a project depend?
  • What are the risks involved for different parties at different stages?
  • How should certain risks be priced and allocated to the appropriate stakeholder?
  • Is a P3 approach being used to sidestep standard budgetary procedures and mask fiscal impacts? If so, what is the added cost?

In the months ahead, I am planning to explore tasks involving the characterization of common financing structures, consider how they divide risk and the incentives created, and develop tools to help governments better understand the value of any insurance they are providing. Hopefully such research and tools will help to increase transparency and official understanding of infrastructure investment decisions across the public sector.

Guido Crutchett recently joined GCFP as a research scientist.