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Infrastructure Financing and Sovereign Debt

Paper Session

Saturday, Jan. 7, 2023 10:15 AM - 12:15 PM (CST)

Sheraton New Orleans, Orpheus
Hosted By: Association of Financial Economists
  • Chair: Lemma W. Senbet, University of Maryland

Financing Infrastructure in the Shadow of Expropriation

Viral V. Acharya
,
New York University, CEPR, and NBER
Cecilia Parlatore
,
New York University
Suresh Sundaresan
,
Columbia University

Abstract

We examine the optimal financing of infrastructure when governments have limited financial commitment and can expropriate rents from private sector firms that manage infrastructure. While private firms need incentives to implement projects well, governments need incentives to limit expropriation. This double moral hazard limits the willingness of outside investors to fund infrastructure projects. Optimal financing involves government guarantees to investors against project failure to incentivize the government to commit not to expropriate which improves private sector incentives and project quality. The model captures several other features prevalent in infrastructure financing such as government co-investment, tax subsidies, development rights, and cross-guarantees.

Sovereign Bond Restructuring: Commitment vs Flexibility

Jason Roderick Donaldson
,
Washington University-St. Louis
Lukas Kremens
,
University of Washington
Giorgia Piacentino
,
Columbia University

Abstract

Sovereigns in distress often engage in debt restructuring, typically negotiating with multiple classes of bondholders at once. We use natural experiments to investigate whether sovereign bondholders benefit from committing not to restructure. We find that committing not to restructure one class of bonds is valuable for not only that class, but, in contrast to received theory, for others too. We develop a model to rationalize these cross-bond spillovers. It points to a system of cross-bond equations that, we show, can be exploited to quantify natural experiments and to estimate unobservable elasticities in terms of a few sufficient statistics.

Global Infrastructure: Potential, Perils, and a Framework for Distinction

Camille Gardner
,
Brown University
Peter B. Henry
,
Hoover Institution and Stanford University

Abstract

This paper evaluates the literature that claims poor countries have an infrastructure investment gap of roughly 1 trillion dollars per year and therefore possess widespread opportunities for productive spending on infrastructure. The evaluation introduces and employs a simple framework that concludes this claim is invalid. The framework compares a poor country’s social rate of return on infrastructure investment with: (a) the poor country’s return on private capital, and (b) the average rich country’s return on private capital. The dual comparison reveals that additional investment in a poor country’s infrastructure is: (1) efficient only if the return on poor- country infrastructure exceeds the return on poor-country private capital; and (2) financeable through private rich-country savings only if the return on poor-country infrastructure exceeds the return on rich-country private capital. This dual-hurdle rate framework suggests a two-by-two classification that sorts countries into quadrants according to their potential for efficient investment in infrastructure. The paper then applies the classification to the only existing, comprehensive cross-country estimates of the social rate of return on infrastructure (electricity and paved roads). The conventional wisdom is that there are ubiquitous opportunities for infrastructure investment that meet the two criteria. In fact, only 7 of 53 developing countries clear the dual-hurdle rate in both electricity and paved roads. Where it is efficient to invest, however, the potential for excess returns on infrastructure is quite large—five times larger, in fact, than the excess returns that existed, but have long since been arbitraged away, in emerging- market stocks when foreigners were first permitted to own shares. The framework thus implies a new definition of the infrastructure gap as the amount of investment required to close the difference between the return on infrastructure in poor countries and the return on private capital elsewhere.

Discussant(s)
Giorgia Piacentino
,
Columbia University
Fabrice Tourre
,
Copenhagen Business School
Lemma W. Senbet
,
University of Maryland
JEL Classifications
  • F3 - International Finance
  • G3 - Corporate Finance and Governance