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Avoiding customer and taxpayer bailouts in private infrastructure projects : Policy toward leverage, risk allocation, and bankruptcy


  • Ehrhardt, David
  • Irwin Timothy


Many private infrastructure projects mix regulation that subjects the private company to considerable risk, a government or regulator that is reluctant to see the company go bankrupt, and high leverage on the part of the company. If all goes well, equityholders make a profit, debtholders are repaid, customers pay no more than they expected, and the government is not called on to bail the company out. If all goes badly enough, however, the prospect of bankruptcy will loom. Unwilling to see the company go bankrupt, however, the regulator will have to permit an unscheduled price increase, or the government will have to inject taxpayers'money into the firm. In other words, the combination means customers and taxpayers bear more risk than would appear from the regulations governing the private infrastructure project. The authors examine how these problems have played out in five cases. Then they describe how governments and regulators can quantify the extent of the problems and, using option-pricing techniques, value the customer and taxpayer guarantees involved. Finally, the authors analyze three options for mitigating the problem: making bankruptcy a more credible threat, limiting the private operator's leverage, and reducing the private operator's exposure to risk. The authors conclude that appropriate policy depends on the tax system, the feasibility of enforcing bankruptcy, and the benefits of risk transfer from taxpayer to theprivate sector.

Suggested Citation

  • Ehrhardt, David & Irwin Timothy, 2004. "Avoiding customer and taxpayer bailouts in private infrastructure projects : Policy toward leverage, risk allocation, and bankruptcy," Policy Research Working Paper Series 3274, The World Bank.
  • Handle: RePEc:wbk:wbrwps:3274

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    References listed on IDEAS

    1. Dasgupta, Sudipto & Nanda, Vikram, 1993. "Bargaining and brinkmanship : Capital structure choice by regulated firms," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 475-497.
    2. Yossef Spiegel & Daniel F. Spulber, 1994. "The Capital Structure of a Regulated Firm," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 424-440, Autumn.
    3. Stewart C. Myers, 2001. "Capital Structure," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 81-102, Spring.
    4. Ivo Welch, 2002. "Columbus' Egg: The Real Determinant of Capital Structure," NBER Working Papers 8782, National Bureau of Economic Research, Inc.
    5. Hinojosa, Sergio & Gomez-Lobo, Andres, 2000. "Broad roads in a thin country - infrastructure concessions in Chile," Policy Research Working Paper Series 2279, The World Bank.
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    Cited by:

    1. Ernest Ameyaw Effah & Albert Chan & De-Graft Owusu-Manu, 2015. "Domestic Private Sector Participation in Small-Town Water Supply Services in Ghana: Reflections on Experience and Policy Implications," Public Organization Review, Springer, vol. 15(2), pages 175-192, June.
    2. Mario, Cuevas, 2007. "A Practical Guide to the Assessment of the Vulnerability of the Non-Financial Private Sector," MPRA Paper 1375, University Library of Munich, Germany.
    3. Alexander Moore & Stéphane Straub & Jean-Jacques Dethier, 2014. "Regulation, renegotiation and capital structure: theory and evidence from Latin American transport concessions," Journal of Regulatory Economics, Springer, vol. 45(2), pages 209-232, April.
    4. Etienne B Yehoue & Mona Hammami & Jean-François Ruhashyankiko, 2006. "Determinants of Public-Private Partnerships in Infrastructure," IMF Working Papers 06/99, International Monetary Fund.
    5. repec:bla:jemstr:v:26:y:2017:i:3:p:636-660 is not listed on IDEAS
    6. David Martimort & Flavio Menezes & Myrna Wooders & DANIEL DANAU & ANNALISA VINELLA, 2015. "Public-Private Contracting under Limited Commitment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 78-110, February.
    7. World Bank, 2006. "Approaches to Private Participation in Water Services : A Toolkit," World Bank Publications, The World Bank, number 6982.
    8. Patricia Clarke Annez & George E. Peterson, 2007. "Financing Cities : Fiscal Responsibility and Urban Infrastructure in Brazil, China, India, Poland and South Africa," World Bank Publications, The World Bank, number 6735.
    9. Jean Shaoul & Anne Stafford & Pam Stapleton, 2010. "Financial black holes: The disclosure and transparency of privately financed roads in the UK," Accounting, Auditing & Accountability Journal, Emerald Group Publishing, vol. 23(2), pages 229-255, February.
    10. Nina Budina & Hana Polackova Brixi & Timothy Irwin, 2007. "Public-Private Partnerships in the New EU Member States," World Bank Publications, The World Bank, number 6743.
    11. M. Kabir Hassan & Issouf Soumaré, 2015. "Guarantees and Profit-Sharing Contracts in Project Financing," Journal of Business Ethics, Springer, vol. 130(1), pages 231-249, August.
    12. Daniel Danau & Annalisa Vinella, 2017. "From fixed to state-dependent duration in public-private partnerships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(3), pages 636-660, September.
    13. Clive Harris & Sri Tadimalla Kumar, 2008. "Financing the Boom in Public-Private Partnerships in Indian Infrastructure : Trends and Policy Implications," World Bank Other Operational Studies 10577, The World Bank.


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