A key part of the Business Case involves taking a view on whether or not the investment can be delivered. Central to this decision is whether or not the investments can be funded and financed, where:
- Funding refers to the underlying financial resources or sources of income that pay for the programme or project, usually from taxation or user charges.
- Financing refers to the financial resources or mechanisms that are used to provide the funding and cover the programme or project costs as they occur.
Funding for infrastructure investments are typically provided by general taxation, with supporting funds generated from users and other beneficiaries where those can be identified and captured. In addition to general taxation additional funding contributions can be sourced from:
- Users. Users of a new transport service, where they pay a fee, will provide a direct revenue stream for the investment.
- Other beneficiaries. Wider beneficiaries, including those who benefit from increased land value, may also be charged for the benefits they receive through Business Rates, the Community Infrastructure Levy and Tax Increment Financing.
- Related funding. Additional funds can be generated by other transport charges such as a Workplace Parking Levy or through the commercialisation of the assets themselves through commercial rents for property, advertising and data.
Whilst it is likely that these additional funds will cover only a fraction of the investment principal, they all can play a supporting role in helping the investment deliver better value for money.
A programme or project may be financed directly through local or central government capital budgets. Alternatively the public body may use debt or other sources of finance to meet the capital requirements of the programme or project with the loan paid back over time. Specific revenue sources may be identified or debt may be repaid from general revenues. The terms on which debt and equity providers are willing to offer finance will depend on the risks and return they associate with the investment.
Possible sources of debt include the Public Works Loan Board and EIB. A Municipal Bond Agency (MBA) has also been set up, though no issuance has been made to date. The MBA is expected to issue bonds to finance local authority projects at a lower cost than the Debt Management Office. The current low interest environment means that there would likely to be appetite from investors, if the deal is well structured with a clear funding stream to back it up.
The UK Government Guarantee Scheme can also play a role in supporting municipal infrastructure. It provides a financial guarantee of scheduled principal and interest to any lender to a UK infrastructure investment and was recently used in the Mersey Gateway Bridge project.
Public Private Partnerships
Some investments may be financed via a Public Private Partnership (PPP) in which the public and private sectors work together to deliver the investment. A PPP model usually takes the form of a long term concession arrangement in which the private sector partner invests at the outset on the expectation that they will receive an income stream over the life of the concession. PPPs can be an attractive way finance or part finance investments and they can provide additional benefits in terms of risk management and project delivery. They can however be more expensive in the longer term. A key determinate of the suitability of PPP financing is whether some risk can be transferred and better managed by the private sector.