Funding and financing infrastructure: the joint-use of public and private finance

The paper addresses the issue of the feasible level of private finance in a contract- ing model of infrastructure funding and financing. It characterizes the structure of financial contracts, deriving the conditions under which both public and private finance coexist. A key feature is that access to outside finance and the regulatory decision on pricing and the amount of public subsidy, hence the extent of price recovery, are jointly determined. Mobilizing private finance requires a combination of price for the service and subsidy to the service provider that is large enough, exacerbating the fundamental tension between financial viability through cost recovery and social inclusion. The paper then shows that the feasibility trade-off responds in non-trivial ways to changes in the economic and institutional environment likely to occur along the development path. While improvements along some of these dimensions, notably in the efficiency of bankruptcy procedures, appear to ease access to private finance, others, such as the cost of public funds, actually makes public finance more efficient. Using project data from the PPI database including information on the financial structure, we uncover an inverse U-shaped pattern in the share of private finance, peaking for countries in the upper-middle income range, which echoes our theoretical findings.