THE FINANCING OF INFRASTRUCTURE DEVELOPMENT FROM PUBLIC AND/OR PRIVATE SOURCES.
INTRO
Traditionally, infrastructure projects have been entirely funded from public sources.
Government policy in recent years encourages use of private finance and public private partnerships.
Three sources of funding
o Public
o Private (e.g. PFI)
o Public & Private (e.g. PPP and Not-for-Profits Public Interest Companies (PICs)
BACKGROUND
‘Infrastructure’ is defined as physical things, used by the whole population, that support civilised life. e.g. water supply, sewage treatment, drainage, roads, railways, schools, hospitals, prisons.
Public money is limited and the UK currently has a Public Sector Borrowing Requirement (PSBR) of £several billion. One way of promoting infrastructure development without Government paying for it now, is to promote private investment.
development traditionally funded by Government through taxes
PUBLIC FUNDING
Advantages
Direct from Government
Government can get better interest rate on borrowing than private sector
Government controls the whole process
Government has to answer to electorate rather than to shareholders – therefore act in public interest
importance of infrastructure: requires publicly-accountable body
no profit element – all funds go into project
stimulates economy and creates jobs
Disdadvantages
Money can only come from Government where funding is limited
Taxes are increased to pay back loans
Public sector retains risk
Public sector finance and management are subject to the uncertainties of general / local elections and change in policies throughout development of project (more stability in private developer).
long-term planning difficult due to short-term political aims – change of government every 4-5 years
everyone contributes through taxes, whether a user or not
PRIVATE FUNDING
Principle
The principle behind PFI is that the public sector decides what assets and services need to be delivered, and the private partner Designs, Builds, Finances, and Operates the assets over a period (generally 25-30 years)
PFI emerged as a result of concerns that public sector infrastructure development is subject to unacceptable cost and time overruns. PFI attempts to deliver better value for money for these projects.
Some markets are suitable for wholly private finance, where funds ultimately come from the customers of the companies with no taxpayer’s money being invested (e.g. Energy sector: Scottish Power, Powergen, n-power etc.)
Advantages
Reduces costs to taxpayer and releases public funds.
Private sector carries financial risk.
Private sector tends to: be more efficient; have good organisation and management abilities; and have an aggressive cost reduction culture.
Less bureaucratic than public bodies. more flexibility than public funding
More stability in private sector (e.g. not influences by politics).
Payment of capital cost is spread over an extended time period rather paid up-front.
PFI schemes consider whole-life costs. (therefore quality maintained)
Government policy encourages private funding.
possibility for only end users to get charged (direct tolls)
Government funds released for more social uses e.g. education
Disadvantages
Complex contract documentation. Lenders need to spend a lot of time evaluating risk.
• Bidding for PFI can be a lengthy and expensive process.
• Money has to be repaid with interest
• Non-recourse to sponsor – if the scheme fails – investor will lose.
• Public perception is often negative in terms of control, ownership and accountability of assets
• Government has been accused of ‘railroading’ local authorities into using PFI by limiting central funding for other forms of procurement
• The Institute for Public Policy Research (IPPR) considers that the Government places too much emphasis on PFI, rather than PPP and Not-for –profit PICs.
PUBLIC PRIVATE PARTNERSHIP (PPP)
Principles
• The financing of PPP developments is split between public and private sources.
• It builds on the benefits of both public and private finance and has the additional advantage that cheaper loans can be made available to private companies when underwritten by the Government.
• However, public perception is often that PPP is actually ‘privatisation by the back door’.
• government can back loans with bonds – private sector borrows more cheaply
CONCLUSION
• Infrastructure development can be funded from a variety of sources. 3 main sources have been discussed in this report.
• PFI and PPP have potential benefits to the taxpayer, but these are highly variable from project to project and from sector to sector. The main advantage of private finance is that the financial risks are transferred to the private sector.
• In some sectors the infrastructure has been wholly Privatised, removing the burden of expenditure from government funds altogether.
• The current emphasis of Government policy on PFI and PPP is likely to continue for the foreseeable future.
• private financing useful procurement method
• not suitable for all projetcs