I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do.
-Leonardo da Vinci
Financing for PPP ideally involves long tenor debt, at fixed rates. This allows the high upfront cost of infrastructure to be spread out over its long lifecycle (as much as 30-50 years), and therefore makes the infrastructure more affordable; the fixed rates help avoid sudden changes in financing costs and therefore user tariffs. Long-term financing (12-18 years tenor), either with fixed interest rates or with variable interest rates that are supported by interest rate swaps to become fixed, are generally available in the global currencies, e.g. US Dollar, Euro, Yen and Pound Sterling (with notable exceptions during the credit crunches in 2008/9 and 2011/12), but is more difficult to access in developing financial markets.
Long-term infrastructure investments can provide opportunities to debt capital markets, help to increase the depth and breadth of the markets, establish robust yield curves, and provide long-term placement opportunities in local markets that are often starved of such opportunities. Long-term capital for infrastructure can provide a platform for reforms and market dynamism.
Accessing long term financing for infrastructure in local currency is not so simple. Commercial banks in many countries do not have access to long-term liquidity. They fund themselves primarily through short term deposits. The debt capital markets may offer only short to medium term positions (e.g. 3-5 years), depriving banks of the opportunity to lay off long-term loans against long term bond issuances. These banks will face a "liability mismatch" to the extent they lend long-term (long-term loans funded with (the volatility of) short term deposits).
Governments can do much to mobilize long-term local currency debt. Governments regulate financial markets, setting rules for banking and capital markets, to protect different market actors and encourage activity in those markets. They also enable and provide market information, clearing functions, rating of credit risk, exchanges for different instruments, etc. One of the key sources of long term local currency financing is institutional investors, such as pension and insurance funds. Government reform programs can do much to protect institutional investors, and thereby enable them to invest in good projects.
While not a focus of this section, it should be highlighted that, in PPP one of the most important efforts a Government can make to mobilize local currency financing is to prepare projects well, ensuring financially viable projects with bankable risk allocation. Government reforms of financial markets can help address these challenges and release the capacity of financial markets to support PPP development.
This section discusses Government efforts to mobilize long-term local currency finance for PPP, in particular through the use of "intermediaries", such as state owned enterprises (SOEs). Section 6.1 summarizes the sources of long term private capital. Section 6.2 discusses different types of Government intervention to help mobilize long term capital. Section 6.3 analyses the use of intermediaries (e.g. state owned enterprises) to mobilize long-term private capital, and section 6.4 concludes.