Credit crunch & infrastructure finance: assessing the economic advantage of recent policies

Abstract

The financial crisis has had a major impact on the cost and availability of finance for infrastructure. Against this background, many governments have introduced forms of ‘credit- enhancement’ in an attempt to reduce or eliminate default risk and attract additional capital into the sector. Other policies involve the creation of hybrid structures in which public sector liquidity substitutes for private sector debt. This paper describes and evaluates the various models being implemented. We argue that the current hiatus in deal-flow stems from liquidity and capital management risks, rather than concern about credit quality, and models of credit-enhancement therefore fail to target the sources of market failure. Such models are also undesirable since they distort the incentive structure associated with public- private partnerships, and increase the state’s exposure to risk. Most governments have abundant access to liquidity and are unaffected by capital adequacy regulations, and these are strong arguments fo...