Urban Infrastructure Financing Instrument Research And Creation

The development level of urban infrastructure in China is far below the relative level of urban economy. There is a sharp gap between the urban fiscal investment that can be used to support the urban infrastructure development and the required investment while the private capital lacks the opportunity of suitable investment. The reason is short of proper financial instruments that can be use to solve the urban infrastructure financing problems that are brought in by the characteristic of the urban infrastructure. The lack of such instruments will do harm to the urban economy development and in fact it leads to financial repression.As existence is reasonable, the financial instruments that we have had no matter in the history or in the modern society have their advantage, which can be used to reference. But there are some restraints when we try to use some of these instruments directly in reality. In this case, we can design financial arrangement or construct some new instruments based on them as to solve the problem. The urban infrastructure that has net cash flow and can generate profit can finance enough through capital market just like common company except that it should be focused on its public property. The urban infrastructure that has net cash flow but can not generate profit need some fiscal fund as to make its credit upgrade. Thus the subordinate debt is part of its financial arrangement in most cases. The non-profit urban infrastructure that even doesn't have net positive cashflow,it seems only to generate a serial cash flow out and is not economic, but it offer the 'public goods' which is vital to the city.Becasue of the lack of net positive cash flow only government loan and general obligation bond are suitable for these project financing. But, in China, the local government doesn't have the right of issuing municipal bond, so the proper instrument is very scarce.The key barrier of financing the non-profit urban infrastructure that even doesn't have net positive cash flow is that it lack of the expected net positive cash flow. The one way of dispose this problem is trying to set out a shadow toll structure for the project and then using proper financial instruments. As refer to those non-profit infrastructure whose service quantity can be measured their shadow toll structure can be set out according to the service quantity, while to those can not be measured easily theirs may be set out according to some selected proxy index. After the detailed discussion of shadow toll theory and some real cases, I give out a design of a municipal bond embedded with GDP index detail by detail.On the circumstance of law and capital market in China, the using of some of the financial instruments mentioned in the paper has some restraint, so some alternative method are needed. Beside off-shore method, I give out the detail designing cases of shadow toll structure and municipal bond embedded with GDP index both of which are based on real information and circumstance of China. Based on the real data and the analysis, these methods can improve the urban infrastructure financing efficiency and make good use of financial resource.