Across the globe, in emerging economies, as well as highly developed countries, privatization is widely accepted as a means for increasing the effectiveness and efficiency of services traditionally performed by governments. While the merits of privatization are well documented, the question of how privatized services should be financed is often debated. However, since financing is an integral part of the risk-shifting process, evaluating financing sources requires moving well beyond simple comparisons of interest rates. The government needs to analyze and determine the risk allocation structure, including the appropriate mix of private and government financing, which maximizes a project's efficiency and still allows it to proceed in a way that meets the government's objectives for privatization.
This paper discusses the background and approaches to financing privatized projects and addresses the challenge of balancing the use of government financial resources with the requirement to preserve the inherent incentive structure of privatized contracts.