Avoiding Customer and Taxpayer Bailouts in Private Infrastructure Projects: Policy toward Leverage, Risk Allocation, and Bankruptcy
Many private infrastructure projects mix regulation that subjects the private company to considerable risk, a government or regulator that is reluctant to see the company go bankrupt, and high leverage on the part of the company. If all goes well,...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2004/04/3568949/avoiding-customer-taxpayer-bailouts-private-infrastructure-projects-policy-toward-leverage-risk-allocation-bankruptcy http://hdl.handle.net/10986/14300 |
| Summary: | Many private infrastructure projects mix
regulation that subjects the private company to considerable
risk, a government or regulator that is reluctant to see the
company go bankrupt, and high leverage on the part of the
company. If all goes well, equityholders make a profit,
debtholders are repaid, customers pay no more than they
expected, and the government is not called on to bail the
company out. If all goes badly enough, however, the prospect
of bankruptcy will loom. Unwilling to see the company go
bankrupt, however, the regulator will have to permit an
unscheduled price increase, or the government will have to
inject taxpayers' money into the firm. In other words,
the combination means customers and taxpayers bear more risk
than would appear from the regulations governing the private
infrastructure project. The authors examine how these
problems have played out in five cases. Then they describe
how governments and regulators can quantify the extent of
the problems and, using option-pricing techniques, value the
customer and taxpayer guarantees involved. Finally, the
authors analyze three options for mitigating the problem:
making bankruptcy a more credible threat, limiting the
private operator's leverage, and reducing the private
operator's exposure to risk. The authors conclude that
appropriate policy depends on the tax system, the
feasibility of enforcing bankruptcy, and the benefits of
risk transfer from taxpayer to the private sector. |
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