Impact of Economic Policy Uncertainty on Financing Infrastructure

This research will be presented at the MEA’s 89th Annual Meetings in Kansas City, Missouri, from March 21–23, 2025. The study examines how Economic Policy Uncertainty (EPU) affects infrastructure financing choices between Project Finance and General Corporate Finance.

Abstract

Infrastructure can be financed in two ways:

1. Project Finance: Involves a Special Purpose Vehicle (SPV), legally distinct from the sponsor, providing higher verifiability of cashflows but limited recourse to the sponsor’s assets.
2. General Corporate Finance: Allows recourse to sponsor’s assets but with lower control over project-specific cashflows.

Using loan-level data from Dealscan across 22 countries over 20 years, this study finds:

• Overall funding for infrastructure projects decreases during periods of high EPU.
• The proportion of Project Finance deals (by number and value) falls in times of high EPU.
• Lenders prefer recourse to sponsor’s assets during uncertain times, valuing this over cashflow verifiability.

These effects are more pronounced in countries with higher GDP per capita and high bank debt-to-GDP ratios. The results remain robust under alternative definitions of Project Finance and General Corporate Finance.

The findings offer critical insights for policymakers and financial institutions on the impact of economic uncertainty on infrastructure funding mechanisms.

Recommended citation: Dr. Harshal Rajan Mulay, Priyanshu Tiwari, Dr. Rama Seth. (2025). "Impact of Economic Policy Uncertainty on Financing Infrastructure." Presented at MEA’s 89th Annual Meetings 2025.