1 financing of infrastructure is a primary concern to governments due to the role that efficient...

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Essay 11

PLAN

FINANCING TO INFRASTRUCTURE PROJECTS

Introduction:

Importance of financing to infrastructure due to its impact on politics

Discussion point for this essay

• Public financing: traditional financing, increased cost on tax payer, full control on the project

easier to obtain loans and run the project. ncertainty of finance for mega project! re"uiring

huge finance

Ad#antages and disad#antages of public financing

• Pri#ate financing: Ne$ initiati#e from go#ernment, promoting in#ol#ement of pri#ate finance,

ris% transfer to pri#ate company, certainty of completion, #alue for money and promoting

inno#ations to reduce cost.

&echanism of pri#ate financing.

• Public' Pri#ate financing: partially financed by public and pri#ate (joint #enture), benefits of

getting loans as public sector are in#ol#ed. *omplex contract documentation. Loo%s li%e

pri#ate finance.

Ad#antages and disad#antages of pri#ate and public'pri#ate finance.

FINANCING TO INFRASTRUCTURE PROJECTS

+inancing of infrastructure is a primary concern to go#ernments due to the role that efficient

infrastructure play in economic gro$th and social acti#ity. In the , infrastructure pro#ision largely

has been the responsibility of the public sector, since the -econd orld ar. +or example all

motor$ays in the $ere initially constructed through the finance pro#ided by the go#ernment. In this

essay I $ould discuss the three main source of financing to the infrastructure project. /hese sources

are public financing, pri#ate financing (P+I) and public' pri#ate partnership (PPP) financing. I $ould

gi#e emphasis on the pri#ate financing mechanism in infrastructure de#elopment project.

Public financing: /raditionally, infrastructure procurement $as #ie$ed as asset procurement0

decisions relating to pro#ision, production, and financing of assets as $ell as operation and

maintenance of the ser#ices $ere underta%en by the public sector. Assets $ere procured from pri#atesector contractor $hose responsibilities $ere limited to the construction of the asset, and the ris%

associated $ith operation of the facility remained $ith public sector. 1arious ad#antages and

disad#antages of public funding are:

Ad#antage:

• Able to use infrastructure to control construction sector

• +inancing directly from 2o#ernment

• 2o#ernment can get better interest rate than pri#ate sector

• 2o#ernment controls the $hole process of procurement ie design, construction and

maintenance and operation.

• 2o#ernment has to ans$er to electorate rather than to shareholder! therefore act in public

interest.

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Essay 11

• Probably easier to obtain 3uropean nion funds

Disad#antage:

• &oney can only come from go#ernment $here funding is limited

• /axes are increased to pay bac% loans

• All ris% associated to the project ie financing, design, construction, operation and maintenance

lie on to the public sector

• Public sector finance and management are subject to the uncertainties of general' local

election and change in policies throughout de#elopment of project (more stability in pri#ate

de#elopers).

• Need to maintain staff and resources for the project ie design de#elopment and construction

super#ision

• Need the funds to borro$ as mega project $hich re"uire huge capital $ould not be a#ailable

from public course only.

Pri#ate +inance Initiati#e

4ecently, responsibility for financing, producing and operating infrastructure facilities has shifted from

the public sector to the pri#ate sector. /his has come about in the $ithin $ider ideological setting

in the 5678 that $as manifested in #arious forms such as pri#atisation, contracting out, and build

operate and transfer (9/) arrangements.

In 566;, the go#ernment introduced a ne$ policy, the pri#ate finance initiati#e (P+I), to promote the

pri#ate sector<s in#ol#ement in infrastructure and public ser#ice pro#ision. At the heart of this policy is

attracting pri#ate sector<s funds, management and inno#ations to the pro#ision of infrastructure

ser#ices. It $as intended to facilitate close co!operation bet$een the public and pri#ate sectors and

introduced pri#ate sector s%ills and disciplines into deli#ery and management of projects and ser#ices

traditionally underta%en by the public sector. P+I emerged as a result of concern that public sector

infrastructure de#elopment is subject to unacceptable cost and time o#errun. P+I attempts to deli#er better #alue for many for these projects.

P+I co#ers a $ide range of infrastructure ser#ices such as prison, roads, rail, health, and defence,

higher and further education. /he main objecti#es of using P+I in road sector are:

• /o ensure that the project road is designed, constructed, maintained and operated safely and

satisfactorily so as to minimise any ad#erse impact on the en#ironment and maximise benefit

to road users.

• /o transfer the appropriate le#el of ris% tothe pri#ate sector

• /o promote inno#ation, not only in technical and operational matters, but also in financing and

commercial arrangement

• /o foster the de#elopment of pri#ate sector road operating industry in the 0 and

• /o minimise the financial contribution re"uired from the public sector.

/he mechanism used for implementing P+I is concession contracting and #ariant, such as design!

build!finance!operate (D9+), on project basis. nder the umbrella of the concession contract the ris%

associated $ith pro#ision and productions are transferred to pri#ate sector. =ence, parallel to the

concession agreement there is the design and construction contract, on one hand, and the operation

and maintenance contract on the other. n &;> D9+ project the concessionaire is *onnect Plus (a

consortium of -%ans%a, 9elfour 9eatty, At%ins and 3gis), $hich ha#e D9+ agreement $ith -ectary of

-tate. /hen, *onnect plus has design and construction agreement $ith -%ans%a 9elbour 9eatty

(*onstruction ?oint 1enture) and operation and maintenance contract $ith 9elfour beatty and At%ins

(peration and &aintenance ?oint #enture). /hese @sub contract ser#e the purpose of allocating ris%s

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Essay 11

to the parties best able to manage them. In addition, the roles of the contractor, the operator and the

concessionaire are separated to pre#ent role pre#ent.

A P+I project generally passes through fi#e phases: planning, implementation, construction, operation

and transfer. In the planning phase, the go#ernment department classifies its objecti#es0 identifies the

need for a project0 identifies assets to be pro#ided0 in#estigates the mar%et0 produces on outline plan0

ad#isors and assembles the project team. *areful project planning by the go#ernment client is crucial

to the achie#ement of the public sector objecti#es. nly projects of the scale and complexity $here

pri#ate!sectors participation could be beneficial should proceed along this route.

In the implementation phase, the client de#elops the output specification ta%ing into accounts the

ser#ice re"uirements. A significant part of the implementation phase is the bidding process. 9idding

for P+I projects follo$s negotiated procedures under the 3uropean nion procurement rules. /he

choice of the successful bidder is based on the most economically ad#antageous proposal, the tender

that pro#ide most #alue for money to the client.

+ollo$ing the a$ard of the contract, detailed engineering design and contruction $or% begins under a

fixed price design and build contract. All the ris% associated $ith construction are transferred to thedesign and build contract. A bidding consortium in#ariably includes an operator $ho ta%es on the

responsibility of deli#ering the ser#ices specified by the client and carrying out routine maintenance

$ith minimum disruptions to operations. n &;> D9+ contract, there are pro#isions $ithin the

contract to ensure effecti#e ser#ice deli#ery $ith minimum disruptions to traffic flo$ during routine

maintenance operation, in addition to maintaining safety standards. At the end of the specified

concession period, the assets re#ert to the public sector.

/he mechanism by $hich the D9+ *o is reimbursed for ser#ice deli#ery is the shado$ toll. /hat is,

payment is made by the client (as opposed to direct road users). It in#ol#es payment per #ehicle

%ilometre of the project road in accordance $ith a adjustment made for the lane closure and safety

performance.

Public B Pri#ate Partnership (PPP)

/his type of financing is aimed at the sector le#el rather than the project le#el. PPP is a joint

arrangement bet$een public sector client agent such as the =igh$ay Agency (in case of road project),

and a consortium of long term in#estors. /he in#estors setup an in#estment fund to ma%e e"uity

in#estment in specified types of projects $ithin a particular sector (for example, road in#estment fund).

/he in#estor and the client agent $ould be jointly in#ol#ed in the early stages of project identification,

planning and feasibility study. /his is particularly beneficial in the case of road projects $here

technical inno#ation is restricted due to the limited in#ol#ement of pri#ate consortia in the outline

design stage of the project. PPP pro#ides an opportunity to assess $hich projects can and cannot be

financed and pro#ides a setting for a more realistic #ie$ of the ris% apportionment bet$een pri#ate

and public sectors at an early stage of a project life. /his allo$s PPP to facilitate a sound assessment

of indi#idual projects based on their business and economic merits. It pro#ides opportunity of $eeding

out projects that are not fundable through P+I at an early stage.

PPP brings together public and pri#ate sector parties that ha#e a mutual long!term interest in the

project helps separate long and short term objecti#es. &oreo#er, PPP pro#ides the opportunity of

increasing e"uity funds in these projects, hence reducing the high debt!e"uity ratio.

=o$e#er, public perception is often that PPP is actually Cpri#atisation by the bac% door<.

/he #arious ad#antages and disad#antages of the PPP'P+I project are:

Ad#antages:

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Essay 11

• 4educe costs to taxpayer and release public funds

• Pri#ate sector carries financial ris%. /his includes ris% of completing project to programme and

cost as the implications of late deli#ery $ould cause huge financial penalty.

• Pri#ate sector tends to be: be more efficient0 ha#e good organisation and management

abilities0 and ha#e an aggressi#e cost reduction culture. /his gi#es chances for adopting

inno#ations and de#eloping project by considering $hole life cost therefore "ualitymaintained.

• &ore stability of financing to project as pri#ate sector not influence by politics

• Payment of capital cost is spread o#er an extended time period rather paid upfront

• 2o#ernment policies encourage pri#ate funding

Disad#antages:

• *omplex contract documentation. Lenders need to spend a lot of time e#aluating ris%.

• 9idding for P+I can be lengthy and expansi#e process.

• &oney has to be repaid $ith interest.

• Non!recourse to sponsor! if the scheme fails! in#estor $ill loose

• Public perception is often negati#e in terms of control, o$nership and accountability of assets• 2o#ernment ha#e less control

• nly large firms can compete

In conclusion, infrastructure de#elopment can be funded from a #ariety of sources. /hree sources

ha#e been discussed in this essay. P+I and PPP ha#e potential benefits to the taxpayer, but these are

highly #ariable from project to project and from sector to sector. /he main ad#antage of pri#ate

finance is that the financial ris%s are transferred to the pri#ate sector.

/he current emphasis of 2o#ernment policy on P+I and PPP is li%ely to continue for foreseeable

future.

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