Financing Urban Infrastructure

The Project Cycle

Identification: Who is the responsible authority? Who are the stakeholders? How are they involved in the project? Is the project consistent with a wider plan or programme such as an economic development strategy? Have all options (including datum) been considered in the delivery of the wider plan? Is there a budget? How and who will finance the project? Preparation: Prepare several options. Produce feasibility study which sets out facts and figures for options. Determine the criteria for evaluation. Appraisal: This involves comparing the options identified. Determine appraisal components (e.g. CBA, financial analysis, environmental assessment) Negotiation/ Decision: Are decision makers satisfied with appraisal information? Implementation: Monitoring and review during life of project (not just construction). Are the objectives being met? Mid-term review. World Bank

Evaluation: On completion: Has the project achieved its aims? Why is there a different outturn?

Financial Plan

Financial Analysis

APPLICATION OF FUNDS Capital costs Year Year Year Year Year Year Year Year Year Year

1 2 3 4 5 6 7 8 9 10 … Year n

DSM

Land

1 1 1

25

Civil Works

25 30 10

Equipment

15 10

Staffing

SOURCES OF FUNDS Revenues

Recurrent costs Materials

Repayments

Self-gen

Grants

Loan 10 10 30 15

5 12 12 13 13 14 14

2 2 2 2 2 2 2

5 5 5 5 5 5 5

5 10 10 11 11 12 12

16 16 16 12 9 9 9 9 9 9

20

2

5

15

12

Affordability at Appraisal: Are there sufficient sources of funds to finance the applications?

UE1 Term 2 Session 3

17

Key Challenges:

Challenge

Characteristics

Case Studies

Limited resource raising authority of Urban Bodies

Municipal vs State vs National allocation of municipal taxes, duties, tolls and fees.

State vs Municipal resource raising in India

Short & Long Term Capital

Investment returns after 20-30 years

Istanbul, Turkey

Use values vs Exchange values

Insertion of commercial space to finance basic use values

King's Cross Redevelopment, London

Fiscal health of national government

Issuing bonds on behalf of municipalities in high risk areas rather than guaranteeing municipal bonds

Infrastructure Finance Corporation Limited, South Africa

Sub-National Expenditure Responsibilities in China

(Peterson 2007)

(Peterson 2007)

Financing Public Projects Developer Pays Characteristics Financing municipal bonds or developer investments through increased taxes, based on property values

Tax Incremental Financing

Examples Chicago TIF areas, USA

Community incentives with recapture agreements • Clawbacks • Recision • Recalibration

Supply-side economics to maximise jobs & tax-base. - Recover all subsidy costs. - Cancel subsidy agreement. - Adjust subsidy to reflect changing business condition.

Pay for impact costs of development • Impact fees • developer exactions (infrastructure or services) • developer constructed off site infrastructure

Burden of finance to groups not yet present in the area - Internalising the social costs of marginal development - Based on negotiation - Spreading benefits to fringe areas

Land Leasing (Long term occupancy & development rights)

Ending the free/ cheap use of land resources. Capturing land value increments due to public investments

Guangdong, China

Revenue earmarked to finance contracts

Athens International Airport, Greece

Large Scale projects that can typically pay for themselves

TfL, London

Invest early at times of low prices

Shanghai Chengtou Corporation

Government Incentives

Navi SEZ Mumbai, India

Affordable capital for non-traditional businesses

South East Community Loan Fund, UK

Mixing high income and low income areas

South African Townships

Saving costs on basic service provision

Local Authority Service Procurement- UK

CPO, Government Offices Relocation

Rural Land Acquisition, China

Marketing Projects

Guggenheim Museum, Bilbao

High initial costs of remediation determining land use

Greenwhich Millenium Village, UK

Financing public infrastructure through retail

King's Cross, London

Direct and indirect revenue streams outline

Marmaray Tunnel Project, Istanbul, Turkey

Long term partnerships. Profits accruing to both parties

First Base & Barking- Dagenham

Public Private Partnerships

State of Maine Clawback Act 2243, USA

Section 106, UK Section 106, UK

Public Financing Bond Issuance Government Fiscal Input Enterprize Zones Revolving Loan Funds (RLF's) Amalgamating tax bases Cross border joint ventures Acquiring Land Catalyst Financing Public Attraction Projects Brownfield Projects Retail Finance Private Financing Bank Credit Joint Ventures

(Peterson 2007; White, Bingham, and Hill 2003; Chapman 2008)

Who pays?: temporal dimensions

Characteristics

Example

Previous Generation

Monetising an inherited public asset

Land leasing

Current Generation

Paying for the use of infrastructure

User fees

Current to Near Future Generation

Paying for the use of new infrastructure

Impact fees

Future Generation

Repayment of loans

Fiscal spending

Adapted from (Peterson 2007)

Tax Incremental Financing: An alternative to redistribution? Designate an area in need of improvement. GIS data can generate boundary lines. Typically the area is run down and there are no citywide financing opportunities or ones based on user fees. Most States only allow the use of TIF in areas where there is a sufficient number of 'blighted' properties. Municipality prepares a redevelopment plan with key projects to be developed within district. These projects include historic preservation, industrial expansion and downtown redevelopment. All these projects need to create substantial increases in the value of property. Municipality in collaboration with developers prepare eligibility study to demonstrate that the area meets 'blight' criteria. Study also needs to prove that no combination of bonds, abatements and tax revenues are sufficient to attract private investment. Once area is designated all properties within the area are valued and this figure is held constant for a fixed period. All the property values added together to give a base against which growth will be measured. Municipality uses coercive powers such as land assembly, site clearance, street improvements to make district attractive to potential businesses or developers. As private investment is attracted in the area, the assessed value of property and tax are expected to rise. Difference between new assessed value and base is the Tax Increment. TIF district has overall control of incremental tax over any other taxing bodies with jurisdiction over the area. To kick-start process, municipalities issue a bond or ask a developer to pay up front. A developer may for example develop a plot of land where there is a rent-gap. Any incremental tax due to the new use will be diverted to the TIF. Municipalities then pay the developer once a year as the incremental taxes are received from the increase in value of all properties.

Critiques Too often the municipality captures increment which it did not induce. For example city-wide regeneration. School or other tax jurisdictions are therefore losing tax revenue. Property value increases offset with property value decreases outside TIF areas Retail moves to different parts of the same region so overall benefits to municipality are offset Rising property values may in the long run displace residents

(White, Bingham, and Hill 2003)

Standard & Poor

Tax Incremental Financing

City of San Antonio

(Weber, Bhatta, and Merriman 2007)

Clawbacks, Recisions & Recalibration in Public Subsidies

(White, Bingham, and Hill 2003)

Section 106: Rationalising the Impacts of Development

The Standard Charge covers contributions for Education / Training, Sustainable Transportation, Open Space, Sport and Air Quality and will be sought on applications which: • A new residential unit is created, £3,000 per additional bedroom will be sought; • An increase of over 500sqm in commercial floor space (B1/B2/B8), £25 per sqm will be sought

In addition to the obligations outlined above, other potential obligations include: • • • • • • • • • • •

Affordable housing Creation of open spaces, public rights of way Community or Affordable Workshop space. Servicing agreements CCTV Adoption of new highways, Travel Plans. Health Care Provision Remove new residents’ rights to parking permits. Local employment and training strategies Compliance with the Considerate Contractors Scheme. Measures to encourage sustainability and bio-diversity, such as green roofs etc Brent County Council

Calculating Development Exactions & Impact Fees

Demand: The increased need for infrastructure or services Determine 'demand unit': A single identifiable entity with a set infrastructure and service demand

•

Cost: Outlay necessary to provide the services •

These may need to be paid upfront if they are built prior to the arrival of the units of demand

Revenue: Enhancement to government resources •

New growth should only finance its needs rather than previous infrastructure investments in other areas of the community •

If new growth produces a fiscal surplus, this should be credited against the exaction

The Municipality as an Asset Manager

Hold asset and use as collateral

Re-price and set user charges

Sell and invest in infrastructure

Risks with Land Leasing & Collateral

Not as regulated as fiscal borrowing and proceeds may be diverted to finance municipal operating budgets rather than investments.

Real Estate Bubbles. Due to long project periods, land values may considerably drop and not able to match spending.

Increased dissatisfaction of those whose land is being taken.

Case Study: Land leasing Revenues in select Chinese Cities Since 1994 all leasing revenues assigned to Municipalities

(Peterson 2007)

Typical leases of 40-70 years

PPP Contractual Arrangement Variations

Athens International Airport 30-year concession ratified by Greek Law 2338/95 Airport Company has the exclusive right to occupy and use the site for the purpose of the "design, financing, construction, completion, commissioning, maintenance, operation, management and development of the airport Shareholders of private company: Greek Government: 55% HOCHTIEF AirPort GmbH: 26.545% HOCHTIEF AirPort Capital GmbH: 13.33% Horizon Air Investments S.A.: 5% Flughafen Athen-Spata Projektgesellschaft mbH (FASP): 0.125% stake

Revenue Bonds & Guaranteed Bonds in the USA

(Pagano and Perry 2008)

Moody's Ratings Definitions

Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk. Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. A Obligations rated A are considered upper-medium grade and are subject to low credit risk. Baa Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics. Ba Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk. B Obligations rated B are considered speculative and are subject to high credit risk. Caa Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk. Ca Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. C Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest. Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

Moody's

Moody's

Case Study: TfL Bond Issuance 3, 2006 TfL debt rating

AA Standard & Poors; Aa1 Moodys

Targeted to specific investors

[4.6% maturing in 2031; 4.5% maturing in 2041] compared to bond issuance 1 at 5%

Competitively Priced

Premium of 0.36% points over government borrowing. The markets then improved this to 0.29% points and 0.34% points above government borrowing.

Based on long term inflation of ticket prices

Up to 40% price rises in 2006

TfL

Buying Payroll & The Graduated Sovereignty of SEZ Case Study: Korea, neoliberal pockets within a developmental State

(Park 2005)

Revolving Loan Funds Traditional Lending

Revolving Loan Fund Lending

Capitalised by deposits from account holders

Capitalised from low cost government loans or foundations

The Rowntree Foundation

Catalyst Projects

The Competition for Sales Tax

(Pagano and Perry 2008)

Case Study: Bishopsgate Goods Yard

Bibliography Chapman, Jeffrey I. 2008. The Fiscalization of Land Use: The Increasing Role of Innovative Revenue Raising Instruments to Finance Public Infrastructure. Public Works Management Policy 12, no. 4 (April 1): 551-567. doi:10.1177/1087724X08316159. Pagano, Michael A., and David Perry. 2008. Financing Infrastructure in the 21st Century City. Public Works Management Policy 13, no. 1 (July 1): 22-38. doi:10.1177/1087724X08321015. Park, Bae-Gyoon. 2005. Spatially selective liberalization and graduated sovereignty: Politics of neo-liberalism and "special economic zones" in South Korea. Political Geography 24, no. 7 (September): 850-873. doi:10.1016/j.polgeo.2005.06.002. Peterson, George J. 2007. Financing Cities: Fiscal Responsibility and Urban Infrastructure in Brazil, China, India, Poland and South Africa. Sage Publications Pvt. Ltd, April 4. Weber, Rachel, Saurav Dev Bhatta, and David Merriman. 2007. Spillovers from tax increment financing districts: Implications for housing price appreciation. Regional Science and Urban Economics 37, no. 2 (March): 259-281. doi:10.1016/j.regsciurbeco.2006.11.003. White, Sammis B., Richard D. Bingham, and Edward W. Hill, eds. 2003. Financing Economic Development in the 21st Century. M.E. Sharpe, February.