Large Infrastructure Investments: Financing Mechanisms and Incentives in Decentralised Countries

Abstract

Infrastructure services crucially affect competitiveness and efficiency. They are essential but they usually require important amounts of public funds. In decentralised countries, regional governments cannot usually afford large infrastructure projects, so co-financing with the central government is required. The aim of this paper is to demonstrate the influence of the central government financing mechanisms on the contract offered by the regional government for the construction, maintenance and operation of the infrastructure. We prove that if the central government uses certain financing mechanisms (total cost coverage), the regional government may have no incentives to offer an efficient contract to the firm.