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Global Developments in Public Infrastructure Procurement

Evaluating Public–Private Partnerships and Other Procurement Options

Darrin Grimsey and Mervyn K. Lewis

There is widespread acceptance of the importance of infrastructure, but less agreement about how it should be funded and procured. While most public infrastructure is still provided in-house or by traditional procurement methods – with well-researched strengths and weaknesses – the development of service concession arrangements has seen a greater emphasis on lifecycle costing, risk assessment and asset design as featured in a variety of public private partnership (PPP) delivery models. This book examines the various procurement approaches, and provides a framework for comparing their advantages and disadvantages. Drawing on international experience, it considers some of the best and worst examples of PPPs, and infrastructure projects generally, along with the lessons for improving infrastructure procurement processes.
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Chapter 10: Funding of infrastructure

Evaluating Public–Private Partnerships and Other Procurement Options

Darrin Grimsey and Mervyn K. Lewis

Extract

Due to its project financing heritage, much of the literature associated with infrastructure is concerned with financing, that is, the raising of money by the private sector to build the facilities. However, the finance for public infrastructure eventually has to be repaid by government. This is the funding of infrastructure, and poses the more difficult issues for government entities when procuring infrastructure. There can be resort to borrowing, but governments have been reluctant to increase debt and risk a credit rating decline. General revenues are a traditional source of funds, but raising taxes is unpopular, and cutting spending runs foul of the welfare lobby. For these reasons, governments have sought new funding sources. One is ‘value capture’, whereby a variety of methods are employed (betterment levies, property taxes, ‘city deals’, developer contributions) to gain revenue and levy charges upon those who benefit from an infrastructure project (for example, a light rail development that increases land values along the route). A case study is provided of what is undoubtedly the largest example of value capital, namely Crossrail in the London Underground system. A second source is ‘asset recycling’ whereby governments themselves construct the infrastructure and, after it has been ‘tested’ and its risk profile established, sell it off to investors willing to buy ‘mature’ infrastructure assets. The returns on the acquired infrastructure are governed by long-run incremental cost or by the regulatory asset base (RAB) model, as illustrated for the Thames Tideway Tunnel. Finally, there is potential for road pricing, needed to fill the gap created by the eroding base of dedicated road taxes.

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