DP15288 A Model of Infrastructure Financing

Author(s): Viral V. Acharya, Cecilia Parlatore Siritto, Suresh M Sundaresan
Publication Date: September 2020
Programme Areas: Public Economics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15288

Infrastructure projects involve multiple parties: government, private sector firms that build and manage, and outside investors who supply financing. Private sector firms need incentives to implement and maintain the projects well; governments may lack commitment not to extort cash flows (for instance, by limiting user fees) from projects once implemented. This double moral hazard problem limits the willingness of outside investors to fund infrastructure projects. To ameliorate these two moral hazards, we show that the optimal design of infrastructure financing features (I) government guarantees to investors against project failure; (II) bundling of development rights for the private sector and investors; (III) tax subsidies to the private parties out of infrastructure externalities; and, (IV) "general obligation" financing in the form of cross-guarantees between high-quality projects and "revenue only" financing without cross-guarantees for low-quality projects. These features are found to be relevant in the practice of infrastructure financing.