Last Updated:
5 Aug 2020

Avoiding Customer and Taxpayer Bailouts in Private Infrastructure Projects

Policy toward Leverage, Risk Allocation, and Bankruptcy Author: David Ehrhardt and Timothy Irwin

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 upon 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.