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Government support to private infrastructure projects in emerging markets

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Author Info

  • Dailami, Mansoor
  • Klein, Michael

Abstract

Driven by fiscal austerity and disenchantment with the performance of state-provided infrastructure services, many governments have turned to the private sector to build, operate, finance, or own infrastructure in power, gas, water, transport, and telecommunications sectors. Private capital flows to developing countries are increasing rapidly; 15 percent of infrastructure investment is now funded by private capital in emerging markets. But relative to needs, such private investment is progressing slowly. Governments are reluctant to raise consumer prices to cost-covering levels, while investors, mindful of experience, fear that governments may renege on promises to maintain adequate prices over the long haul. So investors ask for government support in the form of grants, preferential tax treatment, debt or equity contributions, or guarantees. These subsidies differ in how they allocate risk between private investors and government. Efficiency gains are greatest when private parties assume the risks that they can manage better than the public sector. When governments establish good policies--especially cost-covering prices and credible commitments to stick to them--investors are willing to invest without special government support. Privatizing assets without government guarantees or other financial support is possible, even where governments are politically unable to raise prices, because investors can achieve the returns they demand by discounting the value of the assets they are purchasing. But this is not possible for new investments (greenfield projects). If prices have been set too low and the government is not willing to raise them, it must give the investor financial support, such as guarantees and other forms of subsidy, to facilitate worthwhile projects that would not otherwise proceed. But guarantees shift costs from consumers to taxpayers, who subsidize users of infrastructure services. Much of that subsidy is hidden, since the government does not record the guarantee in its fiscal accounts. And taxpayers provide unremunerated credit insurance, as the government borrows based on its ability to tax citizens if the project fails, not on the strength of the project itself.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1868.

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Date of creation: 31 Jan 1998
Date of revision:
Handle: RePEc:wbk:wbrwps:1868

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Related research

Keywords: Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Public Sector Economics&Finance; Banks&Banking Reform; Municipal Financial Management; Banks&Banking Reform; Public Sector Economics&Finance; Municipal Financial Management; Environmental Economics&Policies; Financial Crisis Management&Restructuring;

References

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  1. Klein, Michael, 1996. "Risk, taxpayers, and the role of government in project finance," Policy Research Working Paper Series 1688, The World Bank.
  2. Dailami, Mansoor & Leipziger, Danny, 1997. "Infrastructure project finance and capital flows : a new perspective," Policy Research Working Paper Series 1861, The World Bank.
  3. Huizinga, Harry, 1997. "Are there synergies between World Bank partial credit guarantees and private lending?," Policy Research Working Paper Series 1802, The World Bank.
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Citations

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Cited by:
  1. Klingebiel, Daniela & Ruster, Jeff, 2000. "Why infrastructure financing facilities often fall short of their objectives," Policy Research Working Paper Series 2358, The World Bank.
  2. Dailami, Mansoor & Leipziger, Danny, 1997. "Infrastructure project finance and capital flows : a new perspective," Policy Research Working Paper Series 1861, The World Bank.
  3. Dailami, Monsoor, 2000. "Financial openness, democracy, and redistributive policy," Policy Research Working Paper Series 2372, The World Bank.
  4. Marco Sorge & Blaise Gadanecz, 2004. "The term structure of credit spreads in project finance," BIS Working Papers 159, Bank for International Settlements.
  5. Etienne B. Yehoue & Mona Hammami & Jean-François Ruhashyankiko, 2006. "Determinants of Public-Private Partnerships in Infrastructure," IMF Working Papers 06/99, International Monetary Fund.
  6. SECRIERU Angela & LOPOTENCO Viorica & CIUMAC Eugenia, 2009. "Public investments and public-privat partnerships development," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 12(1 Special), pages 56-61, July.

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