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Comparing and Understanding Infrastructure Delivery and Financing

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Infrastructure projects are mapped into a simple framework of quadrants developed within MIT’s Civil and Environmental Engineering Department in the 1990’s (the MIT Framework). The MIT Framework distinguishes between Direct and Indirect financing strategies, and Segmented and Combined delivery strategies.

MIT Framework

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The horizontal axis represents the degree to which the design, construction, and long term operations and maintenance of an infrastructure facility are segmented into multiple contracts or combined in a single contract. The vertical axis represents the degree to which funds to pay for capital and operating cost are direct or indirect.

Project Delivery: Who Contracts With Government to Deliver What?

Governments choose the “right” mix of two basic delivery strategies:

Segmented – government provides for design, construction, and long term O&M services on a piecemeal or “segmented” basis by separately hiring designers, construction contractors, and operators. Operation and maintenance is a separate task, separately provided by government, by the private sector, or by combination of government and the private sector.

Combined – government combines design, construction and long term operation and maintenance in a single contract with a single entity. Infrastructure delivered through a Combined or life-cycle strategy includes all forms of “public-private partnerships.” Delivery strategy is mapped along the Project Delivery (horizontal) axis in the MIT Framework.

Project Financing: Who Pays (At Least Initially)?

Governments choose the “right” mix of two basic financing strategies.

Direct – is for government to pay for design, construction, operations and maintenance with cash that it raises. Governments raise their own funds through sales and/or income taxes, user fees, charges, or through independent revenue streams. Governments often borrow funds in private sector capital markets to have cash on hand to pay for ongoing obligations like public infrastructure. Where government assures the private sector that revenues stream from tolls, user charges, or government payments will be sufficient to provide a return on investment, including profit, such a government commitment is “Direct” funding.

Indirect – is for government to position an infrastructure asset so that the private sector pays for design, construction, operations and maintenance along with the opportunity to recover such payments plus a reasonable return through the collection of tolls or user charges. Financing strategies are often a combination of these two basic strategies –mapped in the MIT Framework along the Project Financing axis. Governments may also choose a private sector answer to “Who pays?” In this approach – Indirect – a government positions a public infrastructure asset in such a way that the private sector agrees to pay for design, construction, and long term operations and maintenance in exchange for the opportunity to recover this investment plus a reasonable return on this investment through the collection of tolls or user charges. The private sector typically contributes equity and borrows the balance of required funds in private sector capital markets. Where the timing, amount, and sufficiency of the revenue stream from tolls and/or user charges is at the private sector company’s risk, the answer to “Who pays?” is the private sector – the financing approach is Indirect. From the user’s point of view, the user/consumer is always paying: through gasoline, sales, or income taxes or through tolls paid that permit Direct financing; or through tolls and user fees paid to private sector companies that permit Indirect financing. From a practical viewpoint, unless an Indirectlyfunded project provides better service, higher value, and/or lower cost to users, consumers view Indirectly financed projects as additional tax burdens.

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Tagged in: 2010 Annual Report
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