The global economic and financial crisis of the past years has reduced the amount of public funds available for infrastructure development in most countries. Although most economies have recovered from the crisis, the lack of public funds for infrastructure development still persists and it is challenging governments to find new ways to fund investments.
A new whitepaper by Brattle economists demonstrates that due to limited public funds available for infrastructure, private capital will play an important role in financing infrastructure projects over the coming years through Public-Private Partnership (PPP) contracts. Their design will allow low-cost financing from private counterparts and an efficient management of the assets when two conditions are met: (i) risks are allocated to the party best suited to bear them; and (ii) project cash flows are predictable and guarantee the proper compensation of realized investments at a fair market return. In the absence of a proper allocation of risks, private investors will ask for higher returns or be unwilling to invest.
“Our experience shows that successful infrastructure projects funded by private capital require robust contractual frameworks which minimize the degree of uncertainty and protect private investors and the public interests from undesired outcomes, such as, for example, a company default, or socially unsustainable levels of charges,” commented Brattle principal Francesco Lo Passo, co-author of the paper.
The paper applies economic analysis the authors have conducted on specific projects, describes the main lessons learned about contractual risk allocation in infrastructure projects, and highlights contractual conditions that are positively perceived by investors.
“Infrastructure, Private Investments and Allocation of Risks: An Economic Analysis of Lessons Learned,” is authored by Dr. Lo Passo and Senior Associate Lucia Bazzucchi.