Can a new model of infrastructure financing mitigate credit rationing in poorly governed countries?

Abstract

We explore why resource-financed infrastructure—whereby developing countries pledge future resource revenues to repay infrastructure loans—mitigates credit rationing in poorly governed countries. Using a novel project-level database, we find that the loan sizes for resource-financed infrastructure are much larger than those determined by the traditional government infrastructure purchasing model especially in poorly governed countries. We use the credit rationing model to explain these empirical patterns. The traditional government infrastructure purchasing model suffers from two limitations: the borrowing government may steal infrastructure funds, or fail to make a credible commitment to using taxation to repay its sovereign infrastructure loans. The new financing model solves such problems by allocating loans directly from the lender to the contractor minimizing government corruption, and channeling resource revenues into an independent escrow account to repay infrastructure loans. Our findings highlight that this new infrastructure financing model can alleviate credit rationing in poorly governed, resource-rich countries.