11.+Project+Financing

Sara, Jessica, **Blayde**, Chris

=Chapter 11: Project Financing=

By now it has been established that sustainable infrastructure is a major topic in the world today. Financing is possibly the biggest issue behind the development of these projects. Capital investments from any number of sources must be made in order to build large scale infrastructure facilities. A problem has been occurring at this initial funding stage, however. The world is changing incredibly fast, and the financing of infrastructure is falling behind. Sustainable technologies have received criticism because often they are not the most economically beneficial option. New ideas must be contrived and instituted in order to overcome these challenges. If there is no financial support, the green revolution will die along with infrastructure facilities. Societies across the globe could begin to crumble. This chapter will be devoted to the funding of sustainable infrastructure, and how new funding opportunities are making large scale infrastructure projects once again an economic asset instead of a burden.
 * 11.1 Introduction **

Traditionally, national and state governments have controlled the projects because they are so important to the country and its citizens. The twentieth century saw thriving expansion in both population and infrastructure all over the world. As it always does, however, the money ran out. Now due to exponential population growth, the issues have been complicated. Economic conditions have changed and there are disagreements over priorities. As we get deeper into the twenty-first century, there is increasing less funding for infrastructure projects. The United States has a crumbling infrastructure, but the government is stuck in a predicament. It is no secret that the infrastructure is a problem. The issue is that the public sector is ill equipped to deal with these daunting challenges. The country is at a point where nothing is being fixed because there is no funding for it. Costa Rica on the other hand has reached out to the private sector for project financing. This scenario allows for government funds to go toward other issues, but possibly leads to less government control on these extremely important public facilities.
 * 11.2 Need for Funding **

Before an idea can be evolved, it must be funded by some type of investor during the planning phase. Investors are anyone that seeks to gain benefit from a project. The benefit is usually financial, but it can also be an increase in quality of life. Because it is important for investors to weigh their risks and rewards, a preliminary cost estimate must be developed in the planning phase. Once a project is initially financed, it is developed further to a preliminary design which contains a more detailed cost estimate. At this point, investors can more accurately determine the risks and rewards of financing a project. A project then moves forward into the final design with more financial assistance from investors. The next phase, operations and maintenance, can require a wide range of capital input. Roads for example have only minimal maintenance costs after the initial construction. In contrast, a wastewater treatment facility requires a large investment for construction, but also has constant energy and material needs throughout its lifespan. It is evident that financing is a crucial part of every phase of an infrastructure project. Understanding project financing is an important step in developing context sensitive solutions to infrastructure problems.

The sources of funding for infrastructure projects can be simplified into three different categories: 1) Public Sector, 2) Private Sector, and 3) Public-Private Partnerships. Traditionally most large infrastructure projects are funded by local or national governments from the Public Sector. The main source of money comes from taxation of the public. Governments have a duty to serve their citizens, and they do so by providing basic infrastructure. The National Highway System (NHS) is an example of tax-funded infrastructure. Large projects such as these are notoriously difficult to fund. The problem is in finding a balance between which projects to fund and how much tax to charge. If the tax is too much, citizens will not tolerate it and economic growth could be stunted. But if infrastructure lags behind population growth or is not well maintained, the same issues will arise. Consider the NHS example. Almost 60 years ago the vast network of roads was constructed all across the country. In many places the original road is still intact but in serious need of repair. To accommodate all of the maintenance needs for the NHS would require a massive amount of money which would take funding away from new infrastructure projects. The only way to meet all of the demands is to raise taxes. However, people are not willing to pay any more taxes. Federal funds are becoming increasingly strained. For that reason, the second category, the Private Sector, has become increasingly involved in infrastructure projects.
 * 11.3 Sources **

Previously individuals and companies did not have enough capital to undertake large infrastructure projects. Now, for reasons that will not be discussed here, many private entities are seeing profit margins in the billions of dollars. A 2011 study estimated that there is an untapped source of $250 billion of private funds that is readily available for infrastructure projects [1]. Although there has been some interest in privately funded and operated highways, completely private infrastructure facilities are rare for roadways, ports, or water distribution. Energy and telephone lines are for the most part privately owned. Most private funding is incorporated into the third category – Public-Private Partnerships (PPP). Merging the Public and Private Sectors has been greatly successful for creating new infrastructure projects because the risk and reward are shared between the two entities. Governments can no longer bear the burden of funding projects alone. Private companies especially are willing and eager to take on these new investments because the reward can be huge. There are varying degrees of private involvement which are summarized in Table 11.1. This table is adopted from Saravanan, 2008 [2]. Some PPPs such as the BOOT are almost completely under private control for some amount of time before being transferred to the Public Sector. All the while the public get to use the facilities, usually for a fee. This frees up government funds for other projects. The risk is that the government has little control over the facility. The private company has many risks associated with these projects. Other PPPs such as the Finance Only approach keeps a facility under government control. It is like a loan that must be repaid. PPPs are adaptable to almost any situation. For this reason, they are becoming more common for infrastructure projects. It has been proven that most governments cannot keep up with infrastructure demands. The Public Sector must step in if these projects are to be sustainable.


 * Table 11.1 – Types of PPPs **
 * = ** Type ** ||= ** Description ** ||= ** Risk ** ||= ** Reward ** ||
 * = Design-Build (DB)  ||=  Privately designed and built for the public at a fixed price  ||=  Private  ||=  Public  ||
 * = Operation and Maintenance Contract (O&M)  ||=  Public ownership with a private operator under contract  ||=  Public  ||=  Public  ||
 * = Design-Build-Finance-Operate (DBFO)  ||=  Exclusively private control for a long term lease; upon completion the facility becomes public  ||=  Private  ||=  Private  ||
 * = Build-Own-Operate (BOO)  ||=  Much like DBFO except infinite lease  ||=  Private  ||=  Private  ||
 * = Build-Own-Operate-Transfer (BOOT)  ||=  Private entities fund, design, and operate a facility charging user fees; transfer to public sector after lease  ||=  Private  ||=  Private  ||
 * = Buy-Build-Operate (BBO)  ||=  Public facility is transferred to private to be upgraded or operated; public control after time of transfer  ||=  Private  ||=  Public  ||
 * = Operation License  ||=  Private operator receives a contract to operate a facility for some time  ||=  Public  ||=  Public  ||
 * = Finance Only  ||=  Private entity funds a project through bonds or leases  ||=  Private  ||=  Public  ||

It is useful to examine a case study to better understand how PPPs operate in the context of sustainable design. Because this group toured Costa Rica, the refurbished Costa Rican Highway 27 will be used as the case study. Highway 27 traverses hills and valleys from the capitol of San Jose to the beach communities on the Pacific Coast. Finished in 2010, the highway is a PPP between the Costa Rican government and the Spanish company, Autopistas Del Sol. This type of PPP would be considered a Build-Own-Operate-Transfer (BOOT). Autopistas Del Sol is in control of the design, build, and operations on a 25 year plan before they must transfer the facility to the government of Costa Rica. In that time, they are able to charge tolls on the highway to return their investment. An average toll on the road is anywhere between $1 and $5 for a passenger car depending on the distance travelled. In this case, the private entity has almost all of the risk and reward because of their large initial investment and their ability to charge tolls. The Public Sector, on the other hand, has little risk. One risk is losing control of the facility. This is a minor risk because of the contract that was signed. There is also a small risk that the company does not perform adequate maintenance on the road in which case the infrastructure would lose efficiency. Reward without question outweighs risk for the Public Sector. The upgrades cut the travel time in half. The new road is wider, better paved, and has storm water runoff management. Overall the transportation within the country is more efficient and more sustainable as a result. Without private money, the Costa Rican government would not have been able to finance this project. It is proof that PPPs are a facilitator of sustainable infrastructure projects.
 * 11.4 Case Study **



Highway 27 is still very new so it remains to be seen whether it is a success or not. Theoretically the project is a major step towards sustainability in Costa Rica. So why are these types of PPPs not being developed in the United States? Almost all roadway projects are government funded in the US. But the government is beginning to run out of money for large scale infrastructure projects. The Federal Highway Administration (FHWA) has even promoted PPPs recently. Dulles Greenway in Virginia provides an example of why a similar approach to Highway 27 is not common in the US. It is a 14 mile toll road that is classified as a DBFO, which is very similar to a BOOT (see Table 11.1). Unfortunately the road did not receive as much traffic as anticipated and the financing company has had to restructure its debt several times. Also under a DBFO contract, the San Diego South Bay Expressway extends only 9 miles from the only commercial port in San Diego to the freeway system. The financing company, SBXLP, filed for bankruptcy soon after its opening due to costs of litigation and construction. These examples highlight some of the challenges that face sustainable project financing in the US. First, there is already a large road network in the US. PPPs find it hard to compete with free roads because often times there are not enough incentives for drivers to pay the tolls. They simply avoid the toll roads by taking others that go to the same location. This is not the case in Costa Rica because the road system is not nearly as developed. Highway 27 is over 70 km long. People in the US would not pay tolls for a road that long when they could take another road. Second, even if a road receives near-projected traffic volumes the PPP still faces an uphill battle. Only 25 states have approved PPP friendly legislation [3]. It is unfortunate because PPPs have proven to be a viable way to fund sustainable infrastructure projects. Until investors are certain that they can make a profit, PPPs and sustainable infrastructure alike will continue to struggle in the US.

Besides being a catalyst for sustainable infrastructure projects, the nature of PPP agreements enables other sustainable opportunities. Most of the time contracts include stipulations in which the private entity must maintain the facility above some minimum government standard. A government that has adopted sustainable practices might use these agreements to further its country’s investment in sustainability. Although not a PPP agreement, the Allegro Papagayo Resort in Guanacaste, Costa Rica provides an analogy of what is possible. The Sustainable Infrastructure class was fortunate enough to tour this resort. On the tour, they explained that the government had leased the land to their parent company and in return the resort had to complete a number of tasks for the surrounding community. The resort built a road to its remote part of the province and provides electricity to a few surrounding villages. These things were minor to the huge company, but they tremendously benefitted the surrounding community. In a similar manner, PPP contracts have the power to include terms like these. The US government, for example, could require a PPP highway project to receive a Greenroads rating. Although this is theoretical, it is not a far stretch. The PPP system lends itself to these possibilities; another reason why they should be used more frequently for sustainable infrastructure projects.
 * 11.5 Sustainable Opportunities **



Financing is either the driver or killer of a project. Sustainable infrastructure projects have been difficult to finance because of the added cost of green technologies and practices. As populations grow, the traditional publicly funded infrastructure projects will fall by the wayside as government money is stretched by old, crumbling infrastructure. The United States has seen many problems with its aging infrastructure. Costa Rica has addressed its problems with an innovative form of project financing – the Public-Private Partnership (PPP). Partnerships distribute the risk and reward between the Public and Private Sectors; making more opportunities for sustainable practices. These infrastructure problems are only getting worse for the US because the country has not accepted PPPs as the wave of the future.
 * 11.6 Conclusion **

[1] Tisch, Jonathan. “How to Pay for Infrastructure.” The Hill’s Congress Blog, April 2012.
 * References **

[2] Saravanan, Palanisamy. “Financing Sustainable Infrastructure - Assessing the Risks in Public Private Partnership Models.” The Chartered Secretary Journal, November 2008. Available at http://ssrn.com/abstract=1520939.

[3] “Public-Private Partnerships: The US Perspective.” Price Waterhouse Coopers, 2012. Available at http://www.pwc.com.