Funding and Financing Infrastructure: The Joint-Use of Public and Private Finance

Abstract

Attracting private financing is high on the agenda of policy makers concerned with closing the infrastructure gap in developing countries. To date, however, private finance represents a minor share of overall infrastructure financing and the poorest countries struggle to attract any private investors. This paper develops a model that rationalizes these facts. We characterize the structure of financial and regulatory infrastructure contracts and derive conditions under which public and private finance coexist. This requires a combination of regulated prices and public subsidies sufficiently attractive for outside financiers, pointing at a fundamental trade-off between financial viability and social inclusion. While improvements in the efficiency of bankruptcy procedures facilitate access to private finance, institutional changes lowering the cost of public funds make public finance more attractive.

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