Financing infrastructure using floating-interest-rate infrastructure bond

Abstract

This paper proposes a floating-interest-rate infrastructure bond, where the interest of a government bond is paid to investors during the period of construction and the early period of operation. Unlike the usual government bond, which provides a fixed interest rate, the proposed floating-interest-rate infrastructure bond pays a floating interest, the rate of which depends on spillover tax revenues. Effective infrastructure projects have a positive effect on the economic growth of a region, known as the spillover effect. When user charges and the return from spillover tax revenues are below the fixed rate of the government bond, the interest rate will equal to the fixed rate of the government bond. In this case, investors in the infrastructure will receive interest on the government bond at the minimum rate. As the spillover effect of the infrastructure increases, the rate of return for infrastructure investment will become greater than the fixed rate of the government bond. The success of the floating-interest-rate infrastructure bond depends on the spillover effect and on transparency and accountability. Policy recommendations are provided in this paper on how to increase the spillover effect and improve transparency and accountability.

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“…Source : Yoshino, Azhgaliyeva, and Mishra (2020). Spillover effects can be ascertained through the following procedures, presented diagrammatically in the first figure:…”

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“…As the economic entity that mainly undertakes the nancing function of government-invested projects, IAF platform companies are the "rich area" where public resources such as capital, land, and equity are relatively concentrated, and the "high incidence area" of illegalnancing guarantee, illegal borrowing, and illegal borrowing investment. Corruption in the eld of IAF will not only cause huge losses of state-owned assets and increase the risk of government IAF but also lead to serious consequences, such as hidden dangers in the quality of public construction projects, deterioration of the business environment, and damage to the political ecology [3,4].…”