In the current economic climate, beneficiaries of infrastructure schemes will increasingly be expected to contribute financially to it, for example, where new infrastructure unlocks development potential of adjacent sites, and parties benefit from land-value uplift.
The subtle difference between funding and financing is critical in structuring a package of funding to deliver a project. With 'funding' there's no expectation of repayment, however, financing raised must be repaid. While the primary requirement is for upfront capital funding, long term funding sources shouldn't be discounted on the basis that they could support the repayment of any financing used to raise residual capital, provided such sources are ring-fenced for that purpose. For example, car parking income generated by a station development could be utilised to support repaying any financed raised.
Accessing a broad range of funding sources
The challenge of identifying and then securing deliverable funding sources isn't lost on promoters. In an environment of constrained public finances, combined with political and economic difficulties around raising taxes, this creates the push towards considering a broad and innovative spectrum of funding sources.
As illustrated in the diagram, the groupings of different funding sources span:
- direct sources such as user charges and associated revenues/income generated by the assets themselves
- indirect sources, for example taxation increases and value capture mechanisms where say the project itself enables wider benefits such as incremental increases in land values.
Innovative sources of funding could include the use of certain tariffs or measures which relate either to the benefits of a scheme or towards driving greater usage (and hence more revenue generation). For example, a form of tourist tax hypothecated towards, say, funding improvements in connectivity to a city or improvements to the city itself, or a working place parking levy (as adopted by Nottingham) to influence a shift towards public transport usage.
An assessment of each funding source will be required to consider their deliverability within the context of the project. An objective based framework is required to undertake this.
Authorities will increasingly need to demonstrate that a wide range of funding sources have been considered and robustly evaluated. This task requires careful consideration and a bespoke approach to ensure the funding package fits with the infrastructure and wider realm that's being created.
This exercise requires the client to consider the costs they're seeking to fund, and the mechanisms to achieve this. Any residual capital which can't be funded upfront will need to be financed and a corresponding consideration of the sources and mechanisms to repay this, alongside supporting assumptions, risks, and timescales.