The Private Provision of Urban Infrastructure: Financial Intermediation through Long-term Contracts

Abstract

This paper deals with pension fund investment in urban infrastructure projects. It is suggested that the potential returns (and risks) with such projects are significantly greater than comparable fixed-income products though they have long gestation periods like gilt-edged securities. Our argument begins with unique evidence collected from an industry-sponsored research study of Australian infrastructure investment performance. Also analysed in a formal manner are the steps taken in evaluating urban infrastructure projects, ranging from roads and bridges through to hospitals and urban development. It is shown that, notwithstanding the uncertainty endemic to these kinds of project, a commonly desired form of financial intermediation is a formal contract binding the parties to one another over the long term (as much as 20 years or more). While no doubt valuable for many reasons, matching in effect the formal structure of some types of bond, it is suggested that these institutional structures can be more problematic than often appreciated once the world of short-term discrete contracts is left behind. At issue here is the management of contractual performance given that investment performance is a function of both the level of management resources (relative to capital investment) and the expertise of those who operate such facilities over the long term.