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Published online by Cambridge University Press: 05 June 2012
Ultimately, the cost of infrastructure has to be borne by its users or by taxpayers, current or future ones (aside from the limited concessionary component of foreign aid). The investments of public infrastructure firms have traditionally been financed from the public budget (through taxing or borrowing), possibly with a contribution from the enterprises' retained earnings (consumers). Funding by future taxpayers and/or consumers occurs when the infrastructure company borrows money, to be repaid from future revenue. Public infrastructure companies may do this by issuing bonds or shares or borrowing directly from commercial banks or the government. These options are only available to well-managed infrastructure firms in favorable investment climates.
Key Messages for Policy Makers
✓ Be flexible when considering sources of financing. Be ready to mix public and private money to improve value for money, especially in the early days of PPP or when private markets are weak. Public money also helps worthwhile projects that are not necessarily financially viable become more robust, increasing the opportunities for private investment.
✓ Efficiency of financing is key. There is no free ride – someone will have to pay (consumers and/or taxpayers) – so make sure you get the best value for money.
✓ Beware of creating significant risks when using highly structured financing. Overly complex, highly leveraged financing, although cheaper, may create an overly vulnerable project – a robust project is often worth the higher cost in times of trouble – and trouble does happen.
PPP offers alternatives to attract new sources of private financing and management while maintaining a public presence in ownership and strategic policy setting.
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