Private Enterprise and Financial Markets > Infrastructure and Financial Markets
Infrastructure Financing with Unbundled Mechanisms
By José A. Trujillo, Remy Cohen, Xavier Freixas, Robert Sheehy (12/97, IFM-109, En)
Abstract
Concession schemes of the Build-Operate-Transfer (BOT) type for the development of infrastructure projects by the private sector are a means to address the shortage in public resources and the relative inefficiency of the public sector in the provision of certain services. However, such schemes have problems which are aggravated in the case of emerging economies. The issues that we present as problems affecting BOT mechanisms, and the proposals that we make based on unbundled schemes, refer to those projects where the required investment is relatively large in relation to the importance of the net cash flows generated by the infrastructure, after maintenance and operating costs. They also refer to projects whose revenues have a high degree of uncertainty. We argue that BOT schemes, defined by the concentration of all responsibilities (building, management and financing) in a unique private agent (or a joint venture of private agents) are inefficient in the case of projects with the mentioned characteristics (high relative investment and high uncertainty), and can be challenged on the grounds that the unbundling of these responsibilities is a more efficient alternative. More specifically, we argue that there are efficiency gains if financing is made through a neutral special purpose vehicle (SPV) sponsored by the public sector on behalf of the infrastructure users and payers. The positive effects of the unbundled mechanism (which unbundles the project and SPV financing) on the overall cost of the project mainly derive from the more efficient allocation of the objectiverisks affecting it. Such a mechanism allows the mitigation of the consequences of the uncertainty that typically characterizes both revenue flow (demand) and financial cost (interest rates and exchange rates). In addition, the mechanism allows a better treatment of subjective risks of a political and regulatory nature. In addition to the reduction of the overall cost (which in some cases can make a project economically viable), the unbundled mechanism provides the sponsor with a higher degree of flexibility, in particular in the characteristics of the operating and maintenance contracts and in pricing policy. Moreover, the SPV is the appropriate means to channel all public subsidies and guarantees, including those of the multilateral agencies (MLA).
The authors work at Titulización de Activos SGFT, S.A. Madrid, Spain; Cohen & Co., Milan, Italy; Universitat Pompeu i Fabra, Barcelona, Spain; and, Bear Stearns, London U.K., respectively. A version of this paper was presented at the conference: Alternatives to Traditional BOTs for Financing Infrastructure Projects, sponsored by the Infrastructure and Financial Market Division of the Inter-American Development Bank, June 3, 1997 in Washington, D.C. It is a part of the research Mitigating Regulatory Risk in Infrastructure Projects produced by the same authors for the IDB (CMO 960395). The authors are specially indebted to Paulina Beato of the IDB. They would also like to thank Fernando Bautista of Garrigues & Andersen. The comments of two anonymous reviewers are also aknowledged. The findings, interpretations, and conclusions expressed in the paper are entirely those of the authors and should not be attributed in any manner to the IDB.
Last updated: 02/26/07
