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 fixed income products though they have long gestation periods like gilt-edge securities. Our argument begins with recent evidence collected from a Nippon Credit industry-sponsored research study of Australian infrastructure investment performance. Also analyzed are the internal and external characteristics of various kinds of urban infrastructure projects, ranging from roads and bridges through to hospitals and urban development recognizing that these characteristics are important in determining investors likelihood of realizing their expectations. It is shown that, notwithstanding the uncertainty endemic to these kinds of projects, a commonly desired form of financial intermediation is a formal contract binding the parties to one-another over the long- term (as much as twenty years or more). While no doubt valuable for many reasons, matching in effect the formal structure of bonds, it is suggested that these institutional structures can be more problematic than often understood once the world of short-term discrete contracts is left behind. At issue here is the management of these contracts 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.

JEL Classification: G23, G11, R51