Return of the state? An appraisal of policies to enhance access to credit for infrastructure-based PPPs

The global financial crisis had a major impact on the cost and availability of finance for infrastructure-based public–private partnerships (PPPs). In response, policymakers have introduced models of ‘credit-enhancement’ that aim to reduce the risk faced by private investors and attract additional capital into the market. Other policies involve hybrid structures in which public capital substitutes for private finance. The emergence of capital constraints in recent years has resulted from increased sensitivity among investors to liquidity risks and capital adequacy regulations, rather than credit risks. Models of credit-enhancement therefore fail to target the source of the problem directly and distort incentive structures. Given liquid and efficient markets for government debt, the authors conclude that a policy in which the provision of public finance is combined with enhanced risk-bearing by private financiers is likely to be optimal.