1. Financing Urban Public Infrastructure
Module 7: Financing Urban Development
Financing Urban Public Infrastructure
Michel Bellier
Lead Transport Finance Specialist
World Bank

2. Outline Institutional models and allocation of responsibilities
Alternative financing instruments
Effects of financing instruments on urban planning and control

3. Institutional Models and Allocation of Responsibilities

4. 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

5. 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

6. 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

7. Delivery Model: Government
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

8. Government Model Allocation of Responsibilities
Activities
Financing responsibility
Funding
Sources
Financing Instrument
Investment
Government
Municipal Budget
Taxes
Debt
Operations or
User
Tariff
Cut last column, since details later ??
Discussion in more details of each case

9. 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)
Models:
Management contract
Lease
BOT. Many examples on water treatment in China, private not facing users
Concession. Includes investment, production and distribution. Not allowed in China
Above Privatization where no return of assets
Examples in China
Conditions for success?

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

11. Institutional Model: Private 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

12. Matrix of Responsibilities
Model
Investment
Operations
Payer
O & M
Government
Private
Investment: Government
Operations: Government
Lease
Operations: users
BOT
Investment: investors, lenders
Operations: “client”, users
Concession
Investment: investors, lenders Operations : users
Management contract
Company operates assets
Operating Lease
Government finances assets
Company operates them and provides services
BOT and related models
Company finances and operates assets
e.g. water treatment plant
Provides respective services
during the duration of the PPP contract
Concessions
BOT +
Company provides services to end users

13. Alternative Financing Instruments

14. Instrument: Taxes 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

15. Financing Instrument: Tariff
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

16. Financing Instrument: Tariff (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

17. Financing Instrument: Debt
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)

18. Instrument: Debt (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

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

20. Instrument: Bond (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

21. Instrument: Equity
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

22. Financing Instrument: Equity (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

23. Effect of Financing Instruments on Urban Planning and Control

24. Planning Infrastructure Financing Means:
Assessing infrastructure needs
Preparing realistic financing plans
Planning the use of relevant financing instruments

25. 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

26. 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

27. 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

28. Specificities: Public 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

29. Specificities: Private Company Model
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

30. Specificities: Private Company Model (2)
Sponsors should be responsible for their own demand assessment when possible
Otherwise government may have to provide unnecessary uptake guarantees
Arm’s length negotiations are required on grant/ subsidies/ guarantees by government
Amounts and payment schedule should be negotiated with the PPP contract

31. Thank You For Your Attention