How to Finance Transport Infrastructure?

In this essay, we discuss transport infrastructures financing. We review the rationales for public sector intervention based on the arguments of efficiency, equity, and stabilization policy, and we delve into the issue of financing in natural monopolies with economies and diseconomies of scale. Marginal cost versus average cost coverage practices are discussed when the costs the government incurs to raise the funds to pay subsidies are acknowledged. We provide an overview of the relationship between public authorities and private investors to build, operate, maintain, and finance transport infrastructures within the framework of long-term contracts, such as concession agreements, lease contracts, management contracts, and more generally public–private partnerships (PPPs). In this context, we briefly summarize different structures for the payments the private sector party receives for performing its obligations under the agreement—contractible profits, contractible revenues (user fee PPPs, availability-based PPPs, shadow toll-based PPPs), contractible costs (fixed-price vs cost-plus contracts). Finally, we discuss the trade-offs between public finance and private finance, as well as public ownership and private ownership of the asset.