24 M. FAY, D. MARTIMORT, S. STRAUB

# 4. STYLIZED FACTS AND POLICY IMPLICATIONS

Our model helps put in perpective the current renewed interest around private financing for infrastructure, which appears in different guises. The first one is the strong recurrent narrative in policy circles on the need to generate a growing stream of PPPs to boost infrastructure investment levels. The line of argument relies both on the need to mobilize additional ressources, and on the belief that the involvement of private counterparts improves project efficiency.

However, by recent estimates PPPs still represent at most 10 % of the approximately $1.3 trillion invested yearly in infrastructure by developing countries government, not even considering the fact that most of these projects involve an important share of public funds, probably close to half, either directly or indirectly through guarantees (Fay et al., 2017).<sup>21</sup> This means that doubling PPPs would add at most 5% in private contributions to infrastructure investment in developing countries. Similarly, the jury is still out on the efficiency argument.<sup>22</sup> The second one is the idea that trillions of dollars held by institutional investors such as pension funds, sovereign wealth funds, and insurance companies, could somehow be channeled towards infrastructure projects (Arezki et al., 2017). Again, there are strong indications that the scope for this should not be overestimated. Indeed, Inderst and Stewart (2014) rely on several available database on institutional investors to estimate an amount of around $11 trillion of assets under management worldwide, of which under optimistic assumptions, at most $60 billion could flow to infrastructure investment in emerging and developing countries.

Finally, the third argument refers to the idea that public finance may under certain conditions crowd-in private finance towards infrastructure projects through so-called blended finance arrangements. A refined version of this argument is found in the World Bank’s ’Maximizing Finance for Development’ approach, which establishes a step-by-step approach to prioritize and attract non-government guaranteed, commercial financing, by assessing its viability and addressing if needed specific regulatory and institutional reforms (World Bank, 2017a).

These different narratives are clearly related, and call for a better understanding of the specific aspects that determine the desirability and availability of private financing for infrastructure.<sup>23</sup> Our framework helps clarify this debate. It first shows why relatively little private money flows into infrastructure, namely that this requires a combination of regulated prices and transfers that are high enough. In cases where bankruptcy costs are

> 21If anything the Figure for 2016 was even lower, at around 5%. See World Bank (2017b).

> 22See for example the recent report from the French Cours des Comptes (2017), which does not support the efficiency argument in the case of French Prisons (https://www.ccomptes.fr/fr/publications/lapolitique-immobiliere-du-ministere-de-la-justice, accessed January 19, 2018, and Engel, Fischer, and Galetovic (2014), chapter 5 for a general discussion.

> 23Note that the discussion often confuses the issues of private management and/or ownership of assets with that of private financing. While these might be related, there need not be a one-to-one relationship. For example, State Owned Enterprises (SOEs) can also be commercialy financed, through the emission of bonds or bank loans, providing an example of public ownership together with private finance. Also, SOEs often play the role of corporate ”private” partners in PPPs. See the recent Fitch report on Chinese PPPs, Reuters February 19, 2017, http://www.reuters.com/article/fitch-ppps-to-drive-chinainfrastructure-idUSFit989432.