Financing Urban Public Infrastructure

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Financing Urban Public Infrastructure
Module 7 Financing Urban Development

• Michel Bellier
• Lead Transport Finance Specialist
• World Bank

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Outline

• Institutional models and allocation of
  responsibilities
• Alternative financing instruments
• Effects of financing instruments on urban
  planning and control

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Institutional Models and Allocation of
Responsibilities
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What Is Urban Infrastructure ?

• Infrastructure is essential to urban development
• Water
• Water treatment and distribution
• Waste water disposal/treatment
• Transport
• Urban roads
• Urban transport
• Electricity
• Waste disposal

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Urban Planning Has to Address Infrastructure
Financing

• Urban infrastructure entails high initial
  investment and operating costs
• Infrastructure assets and facilities
• Equipment
• Urban infrastructure services share a common
  feature monopolistic situation

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Government Is Responsible for Infrastructure

• Infrastructure services must satisfy users needs
  
• Capacity
• Quality standards
• Planning infrastructure development
• Ensuring that investments are financed and
  implemented on time
• Ensuring that operating services are provided

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Delivery ModelGovernment

• Government can directly provide urban
  infrastructure services
• Especially when service costs cannot be charged
  to users
• Urban roads (non tolled)
• Usual institutional organization government
  department

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Government Model Allocation of Responsibilities
Activities Financing responsibility Funding Sources Financing Instrument
Investment Government Municipal Budget Taxes Debt
Operations Government Municipal Budget or User Taxes Tariff
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Government Can Also Transfer Responsibilities

• Especially when service costs can be charged to
  users
• Water and waste water, urban transport services,
  electricity, waste disposal
• Two main models
• Public utility owned by government
• Private company through a PPP contract (public
  private partnership)

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Public Utility Model Allocation of
Responsibilities
Activities Financing responsibility Funding Financing Instrument
Investment Government or Utility Municipal Budget Utility Budget Taxes, debt Debt
Operations Utility User and (possibly) Subsidy Tariff Taxes
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Institutional ModelPrivate Company

• Partnership government / private sector
• Various PPP models with different allocations of
  responsibilities
• Operations and maintenance contract
• Lease
• Build operate and transfer (assets)
• Concession of service provision to users
• PPP contracts have to be thoroughly regulated

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Matrix of Responsibilities
Model Investment Operations Payer
O M Government Private Investment Government Operations Government
Lease Government Private Investment Government Operations users
BOT Private Private Investment investors, lenders Operations client, users
Concession Private Private Investment investors, lenders Operations users
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Alternative Financing Instruments
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InstrumentTaxes

• Taxes finance the general budget
• All taxpayers contribute, even those who do not
  use infrastructure services
• But when proceeds of specific taxes are allocated
  by law to an infrastructure sector
• Or when property or income otaxes in developed
  areas are proxy charges for some infrastructure
  services

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Financing InstrumentTariff

• Charged on users of services only
• Tariff income should finance all operating costs
• But government may subsidize services
• E.G. When tariff capped for social concerns
• Utility model tariff income should also
  finance debt service

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Financing InstrumentTariff (2)

• Private company model tariff income or client
  fee (BOT) should ensure a satisfactory financial
  return to private investors
• Tariff should be ruled by PPP contract provisions
• Government may contribute to investment when a
  low financial rate of return impedes full market
  financing

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Financing InstrumentDebt

• Debt can be used under all delivery models, but
• Government local governments must be allowed to
  borrow funds (not in china)
• Debt should finance investments (not operations)
• Urban infrastructure requires long term debt
• 10 years with duration linked to assets
  amortization schedule
• Banks assess borrower risks before lending
• Strength of financial accounts affects the cost
  of debt (municipal budget/utility/private Cny)

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InstrumentDebt (2)

• Government model debt finally paid by taxpayers
• Debt reimbursed by the municipal budget
• Utility model a government guarantee may be
  required if utility financially weak or poorly
  managed
• Private BOT or concession project finance debt
• On the basis of the strength of operating income

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InstrumentBond

• Bond long term lending instrument provided by
  financial investors
• Insurance company, pension funds
• Domestic or international investors
• Bonds should finance investment only

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InstrumentBond (2)

• Bond issues are constrained by the country legal
  and regulatory framework
• Municipal bonds are not allowed in china
• Bond availability and pricing depend upon the
  credit rating of the issuer
• Independent credit rating agencies

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InstrumentEquity

• Equity is essentially accessible to private
  companies
• Possibly to utilities through securitization
  (investors, stock exchange) of assets generating
  income
• Investors provide equity if the expected
  financial return is consistent with market level
  and the project risk profile

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Financing InstrumentEquity (2)

• Equity investors are prepared to take more risks
  than bond investors or lenders
• But equity is the most expensive financing
  instrument for private companies
• And utilities when they can attract investors

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Effect of Financing Instruments on Urban Planning
and Control
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Planning Infrastructure Financing Means

• Assessing infrastructure needs
• Preparing realistic financing plans
• Planning the use of relevant financing instruments

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Assessing Infrastructure Needs

• Urban development is dependent upon
  infrastructure
• Demand of services is driven by population growth
  and economic activities
• Infrastructure should be laid down before land is
  developed
• Infrastructure costs should be estimated as from
  preliminary feasibility studies
• Investment and operation costs

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Preparing a Realistic Financing Plan of
Infrastructure

• Balancing financing needs / funding
• Amounts and financing instruments
• Time frame each delivery model entails its own
  decision process
• Setting tariff is part of financing plans
• Objectives operating income should fully fund
  infrastructure services
• But for social constraints

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Specificities Government Model

• The city budget process is affected by the
  planning of infrastructure
• At first assess impact of infrastructure
  financing on budget during construction and
  operations
• Then size funding to balance financing plan
• Impact on tax levels and indebtedness

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SpecificitiesPublic Utility Model

• Independent budget process
• But the municipal budget is affected by
  government contributions to utility
• Financial controls of and reporting by utility
  crucial to assess financial risks for government
• Government can control as owner

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SpecificitiesPrivate CompanyModel

• Assess very early the possibility to mobilize
  private sector skills and funding
• To estimate savings on public expenses
• At the early stage of urban planning
• Set the services objectives, price mechanisms and
  standards in the tender documentation
• Including draft PPP contract

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SpecificitiesPrivate CompanyModel (2)

• Sponsors should be responsible for their own
  demand assessment when possible
• Otherwise government may have to provide
  unnecessary uptake guarantees
• Arms length negotiations are required on grant/
  subsidies/ guarantees by government
• Amounts and payment schedule should be negotiated
  with the PPP contract

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Thank You For Your Attention