Infrastructure Funding Versus Financing: A Value for Funding Analytical Approach to Evaluation

Abstract

This article, the second in the series of four on a Value for Funding (VfF) analytical approach, focuses on an infrastructure funding question and on a meaningful distinction between funding and financing. In particular, this article explores the extent to which different infrastructure delivery options provide new revenue sources and truly address the funding needs without creating new financial liability to the public sponsor; how the nature of such funding affects the public sector deficit risk; and how the intersection of funding and financing helps to further illuminate the underlying funding problem. The authors identify taxes, user fees, and the leveraging of brownfield assets as three primary sources of infrastructure funding. They reveal potential economic distortions that can add to the funding challenges, including the effects of inefficiencies from tax-exempt financing and of the hidden cost of equity capital for public assets largely unaccounted for in current government accounting practices. They also identify the recapitalization and secondary financing market as a potential venue to generate additional funding and also as presenting deeper and wider access points to engage private investors more effectively. Finally, using the VfF framework, the authors show analytically how different delivery options contribute to the funding equation and how such funding directly impacts the public-sector deficit risk profile, especially under a non-revenue-neutral situation when public sponsors are fiscally constrained. Overall, they demonstrate how VfF enhances Value for Money assessments, enabling an accurate and balanced look into the overall fiscal conditions of the public sponsor, thus enhancing the infrastructure delivery decision making.

TOPICS: Project finance, other real assets, legal/regulatory/public policy