Public Infrastructure Financing: An International Perspective

General government investment in infrastructure has fallen in recent years for most of the countries in this study, (information is not available to assess whether this is true for public investment more generally). Nevertheless, overall investment in infrastructure has remained fairly steady in recent years, although volatile in some countries. Total Australian investment in infrastructure has rebounded in recent years to just below 6 per cent of GDP in 2006-07. Sub-national governments undertook 76 per cent of public infrastructure investment, with government trading enterprises accounting for around half of this. With the global financial crisis, governments are looking to infrastructure investment as a way of stimulating the economy. But financing options have also been constrained by the crisis. Financing decisions are separate from the investment decision and can be made independently. Financing differs from public funding - the latter being the commitment of public revenue to meet any gap between the costs of infrastructure provision and the revenue from user charges. Funding decisions carry an opportunity cost and deadweight loss of raising taxes. Budget appropriations, financed on a pay-as-you-go basis or from public debt, remain the major form of financing for government investment in infrastructure (63 per cent in 2006-07). Specific-purpose bonds, where repayment is linked to the performance of the asset, are a major source of finance in the United States and Canada, but were phased out in the 1980s in Australia. Public-private partnerships (PPP), where the government contracts a private partner to variously finance, design, build and operate infrastructure assets for a fixed period, are growing in use. Used extensively in the United Kingdom, in Australia they made up 6 per cent of public investment in 2006-07 - higher in New South Wales and Victoria. Some approaches used to finance public infrastructure can improve efficiency and lower the life-time project cost through - better management of project risk by aligning incentives for risk management with the capacity to manage the risk; improvements in information, contract negotiation and management and other transaction activities that pay-off in better risk management and cost savings; bringing greater market or other scrutiny to bear on the investment, and imposing the costs on potential beneficiaries to better reveal their willingness to pay. The most efficient financing vehicle will depend on the nature of the investment, the degree of asymmetry of information, the potential for competition, and the skills of the government as negotiators and contract managers. The potential for governments to shift risk onto private partners may be limited, and any non-diversifiable risk assumed by the private sector will be reflected in their required rates of return. PPPs offer considerable potential to reduce project risk, but are costly to transact. If such transactions are off-budget, this may inhibit the scrutiny needed to ensure efficient investment. The views expressed in this paper are those of the staff involved and do not necessarily reflect those of the Productivity Commission.

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