Are private investors overcompensated in infrastructure projects?

Abstract

Private sector engagement in infrastructure procurement and ownership can have benefits for both investors and society. However, a significant challenge for authorities is determining when private sector participation provides value for money. Private investors may demand high returns on their investments even in projects with seemingly low risks. Governments with good credit ratings and access to lower cost capital may view private investors overprice in comparison to the level of risk they take. This paper examines whether the financing premiums (in addition to the cost of state financing) of four public-private partnership road projects in Finland are reasonable relative to the risks borne by private partners, using long time series of actual data. To the best of our knowledge, this is the first study to mostly use actual ex-post data on project costs over an extended period to evaluate whether the government overpays private investors. Our analysis indicates that the financing cost of the four projects is on average 201 basis points higher than the financing cost the government pays on its debt. We conclude that this premium is reasonable compensation for the risk the private investors bear in the projects. This finding has implications for selecting the most effective procurement policy for road projects.