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LECTURES 9 NOTES: CONTEMPORARY FINANCING OF INFRASTRUCTURE

TRENDS IN THE PAST DECADE


1. Burden of finance downloaded from upper tier to lower tier governments
2. Ability of municipal level governments to finance infrastructure is limited by the strength of the
local economy/public budget
3. Decline in quality of infrastructure deferred maintenance of infrastructure resulted in a
general crisis
4. More cooperation between governments and private sector more efficient in the supply and
operation of public infrastructure
5. Government trying to provide infrastructure in more equitable, cost effective means
MOTIVATIONS TO INCLUDE PRIVATE SECTOR IN THE PROVISION OF PUBLIC
INFRASTRUCTURE
1. Private sector firms are inherently more efficient
a. For profit more motivation to reduce operation costs
b. Competition encourages efficiency, achieved through:
i. Streamlined production
ii. Technological innovations
iii. Economies of scale
2. To reduce the risk associated with the public sector in major projects
3. Private sector may have greater expertise in a field
4. Private sector is able to hire or reduce staffing much more rapidly
THE STEPS IN THE PROVISION OF INFRASTRUCTURE

PLANNING

The need for public infrastructure is often identified by the public sector local, regional or
provincial governments
Initial planning is typically made by the government:
o Preliminary alignment locations (for highway projects)
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o Suggested locations and land requirements (for solid waste facilities)


o Capacity estimates (for water treatment plants)
DESIGN

Preliminary design:
o Further the alternatives identified in the planning phase
o Identify best alternative
Final design:
o Construction plans
The public sector engages private consulting firms to conduct preliminary and final design for
two reasons:
o Labor intensive tasks
o Requires extensive technical expertise

CONSTRUCTION

Completed by private firms under contract to the public sector


o Public sector provides contractors with a set of plans detailing the work to be completed
o Public sector prepares cost estimates
o Contractors are then asked to submit bids (cost estimates) to complete the work
o The contractor is then selected by the public sector
If insufficient contracting companies exist, fully public contractors may be used

OPERATIONS AND MAINTENANCE

Until recently, nearly all public infrastructure was operated and maintained by the public sector
If the private firm that designs or builds the infrastructure is also required to operate the
infrastructure provides a strong motivation to produce high-quality, low-maintenance facilities

FINANCE
If the public sector finances a project, the capital may be raised in 2 ways:
1. Through traditional taxation
a. Lowest cost alternative for the public sector
b. But may be politically difficult
2. Through the issuance of bonds
a. Higher cost alternative - public sector agency repay the debt with some interest
If a private sector firm finances the project, the firm may raise capital in 2 ways:
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1. Financing from the public sector


2. Borrow the money from the government
OWNERSHIP

Typically must repay the loans with interest, imposing an additional cost on the construction of
the project
financing body maintains ownership of the infrastructure project by default
private sector firm will only be willing to finance an infrastructure facility if the future revenues
can offset the firms investment costs and future operating costs

CONDITIONS FOR SUCCESSFUL CONTRACTING OUT OF SERVICES


1. Competition multiple firms must be available to provide the service
2. Low barriers to entry tasks that require very high startup costs are unlikely to attract many
firms
3. Ease of government oversight - rigid, quantitative technical standards need to be in place and
enforced
o E.g. a measure of the private firms maintenance of its bus fleet might be the number of
unscheduled hours out of operation per month
4. When public objectives do not outweigh private (for profit) interests.
o E.g. the provision of overnight transit service does not cover its operating costs & very
few private firms would be willing to provide this service
COMBINATIONS OF PUBLIC PRIVATE INTERACTION IN THE PROVISION OF
INFRASTRUCTURE

Reading by E.S. Savas.


Public sector agencies always provide oversight
In many cases, the public sector provides funding and retains ownership
In other cases, the private sector provides funding then owns and operates the facility either in
perpetuity or for a prescribed duration, after which the ownership is returned to the government
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DBOM Design, Build Operate and Maintain (a common public private model)

2 OTHER WAYS USED BY GOVERNMENTS TO INCREASE THEIR ABILITY TO


PROVIDE INFRASTRUCTURE
BUSINESS IMPROVEMENT AREAS (BIAS)

Pseudo government agencies


Created by acts of higher tier governments
Canadian by origin 1st BIDs created in Toronto
Have the power to tax typically businesses within a geographic area
The mission: help metropolitan areas compete in a regional context through marketing and other
services
Funding the provision of uniformed persons who perform various activities within the district
including:
1. Safety not independently but in contact with local police
2. Information as a source for tourism / commercial information
3. Cleaning street and sidewalk cleaning and general improvement for the area

SPECIAL DISTRICTS

Combinations of several city or town governments to provide a specific service or infrastructure


The motivations for combining into larger government agencies are:
1. To achieve cost reductions through economies of scale
2. To balance the unevenness in individual municipalitys ability to provide services based
on their respective economic health
i.e. The Kitchener / Waterloo tax base example
3. To ascertain for some municipalities similar governmental powers that are possessed by
other municipalities
E.g. one municipality has the ability to float bonds for infrastructure construction,
while an adjacent municipality does not. Then, by forming a special district, the
district maintains the right to float bonds, thereby providing all municipalities
within the district this power
Some concern about special district governments and their democratic representation
o Because districts are formed without referendum (a general vote)
o Citizens of a municipality join districts without their consent

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