Financing Urban Public Infrastructure

1. 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

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 utilityowned by government • Private companythrough a PPP contract (public private partnership)

10. Public Utility Model: Allocation of Responsibilities

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

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 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

30. Specificities:Private CompanyModel (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