New Times, New Tools:

1
New Times, New Tools Innovation in
Infrastructure Financing, Funding, and Delivery
Casey G. Vander Ploeg, Senior Policy Analyst,
Canada West Foundation. A Presentation to the
Partnering for Public Infrastructure
Conference, May 12, 2008, Toronto, Ontario
2
About the Canada West Foundation
A Public Policy RESEARCH Institute
Independent Policy Institute Non-Partisan and
Non-Political Non-Profit Charity Focus on
Policy Issues Important to the West The PURPOSE
of Canada West Foundation Introduce Western
Perspectives Into National Policy Debates
Produce and Disseminate Objective Policy
Research Act as a Catalyst for Informed Public
Debate Create Initiatives for Citizen
Engagement
3
Background
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Background

• As part of its larger Western Cities Project, the
  Canada West Foundation has produced numerous
  research studies on municipal finance in general,
  and urban infrastructure in particular
• Financing Western Cities Issues and Trends
  (2000)
• Dollars and Sense Big City Finances in the
  West (2001)
• Framing a Fiscal-Fix Up (2002)
• Big City Revenue Sources A Canada-US
  Comparison (2002)
• A Capital Question Infrastructure in Western
  Canadas Big Six (2003)
• No Time to be Timid Addressing Infrastructure
  Deficits in the Western Big Six (2004)
• Big Spenders? An Expenditure Profile of
  Western Canadas Big Six (2004)
• Straight Talk Property Taxes in Western
  Canadas Big Six (2004)
• Foundations for Prosperity Sustainable
  Infrastructure (2004)
• Rationale for Renewal A New Big
  City-Provincial Partnership (2005)
• New Tools for New Times Infrastructure
  Financing, Funding and Delivery (2006)

5
Background
In September 2006, the Canada West Foundation
released New Tools for New Times A Sourcebook
for the Financing, Funding, and Delivery of Urban
Infrastructure. Explores the theory behind
innovative infrastructure finance, funding, and
delivery. A comprehensive inventory of
traditional and innovative infrastructure
financing, funding, and delivery tools.
Assesses the applicability of various
innovative financing, funding, and delivery
tools, and the winning conditions under which
they are used. The study uncovered over 100
specific techniques in an international survey
spanning Canada, the United States, Western
Europe, Australia, and Southeast Asia.
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Quantifying Needs
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Quantifying Needs Total Government Sector
Innovation in infrastructure financing, funding,
and delivery is required because traditional
approaches are unable to contend with Canadas
massive and growing infrastructure needs. While
estimates of Canadas total public infrastructure
deficit vary, the estimates are all invariably
large Asset Management Approaches
(2000-2002) 50
Billion Public Policy Forum 2002 (Survey
Method) 83
Billion McGill Department of Engineering 2003
(Benchmarking) 125 Billion Federation
of Canadian Municipalities 1999 (Benchmarking)
130 Billion Optimal Public Capital Stock
Ratio 2003 (David Aschauer) 570
Billion The McGill University Department of
Engineering estimates that the total
infrastructure deficit of all governments in
Canada will reach 200 - 400 BILLION by 2020 if
no remedial action is taken
8
Quantifying Needs Local Government Sector
Most estimates of Canadas infrastructure
deficit have focused on the municipal sector,
since that sector is responsible for the majority
of public infrastructure. The size of our
municipal infrastructure deficit is enormous,
and it is rapidly growing. Since 1985, the
Federation of Canadian Municipalities has been
tracking unfunded municipal infrastructure
needs 1984 12
Billion 1988 18
Billion 1992 20
Billion 1996 44
Billion 2002 57
Billion 2007 123 Billion These
amounts represent only the backlog of investments
required to bring EXISTING infrastructure back to
serviceable quality. Canadian municipalities
also require an additional 115 billion in NEW
infrastructure.
9
Quantifying Needs Putting the Estimates in
Context
In 2003, the Canada West Foundation sought to put
these estimates in context by analyzing past
levels of government investment in
infrastructure. We concluded that the estimates
were plausible The Foundation examined the
flow of government investment in fixed capital
over the 1961-2002 period, as well as the value
of the public capital stock relative to the
private capital stock. We found that
investment in fixed public capital formation
dropped significantly between 1960-2002. So
did the value of the public capital stock
relative to the private capital stock. If
investment were to move up to the average seen
over the 1961-2002 period, spending on fixed
capital by all governments in Canada should have
been up to 126 BILLION higher in 2002
alone. Much of Canadas infrastructure was
built between 1950 and 1970. Thus, we should
expect investment to have fallen. But the time
for renewal of our infrastructure has also
arrived. Our renewal efforts have been
insufficient.
10
Quantifying NeedsTotal Government Capital Flows
in Real Per Capita Dollars (1961-2002)
SOURCE Derived by Canada West From Statistics
Canada, 1961-2002.
11
Quantifying NeedsTotal Government Capital Flows
as a of GDP (1961-2002)
SOURCE Derived by Canada West From Statistics
Canada, 1961-2002.
12
Quantifying NeedsTotal Government Capital Flows
as a of Canadians Income (1961-2002)
SOURCE Derived by Canada West From Statistics
Canada, 1961-2002.
13
Quantifying NeedsTotal Government Capital Flows
as a of Revenue (1961-2002)
SOURCE Derived by Canada West From Statistics
Canada, 1961-2002.
14
Quantifying NeedsTotal Government Capital Stock
as a of Private Stock (1961-2002)
SOURCE Derived by Canada West From Statistics
Canada, 1961-2002.
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The Scope for Innovation
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The Scope for Innovation
There really is no such thing as entirely new
approaches to infrastructure finance. The scope
for innovation is limited by what the Foundation
calls The Triple-Two Rule The
Triple-Two Rule asserts There are only two
ways to FINANCE infrastructure There are only
two ways to FUND the financing There are only
two ways to DELIVER infrastructure
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The Scope for Innovation
FINANCING refers to how the upfront capital will
be secured to construct a new asset or renew an
existing asset. There are only two broad
approaches Pay-as-you-Go OR Debt
Financing FUNDING refers to how the financing
is repaid in the case of borrowing, or where
pay-as-you-go dollars will come from. There
are only two choices Taxation OR User
Pay DELIVERY of infrastructure refers to who
will be responsible for providing the
infrastructure to citizens. Again, there are
only two broad approaches Public Sector
OR Private Sector
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The Scope for Innovation
The APPROACHES to financing, funding, and
delivery are limited. But the TECHNIQUES to
accomplish the larger APPROACHES are numerous
BORROWING Regular Amortized Debenture
Borrowing Community Bonds Tax-exempt General
Obligation Bonds Tax-exempt Revenue
Bonds Infrastructure Revolving Loan
Funds Infrastructure Banks Private and Public
Pension Funds Senior Government Credit
Enhancements Interest Rate Subsidies
Subordinate Debt Positions Revenue Bond
Guarantees Lines of Credit Direct
Loans Loan Guarantees
TAXATION Personal Income Taxes Corporate Income
Taxes Business Taxes Value Capture Taxes Land
Value Taxes Real Estate Transfer Taxes Tax
Incremental Financing Earmarked
Taxation Vehicle-specific Sales Taxes Resource
Taxation (e.g., Royalties) SPLOST or Penny Tax
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The Scope for Innovation
The TRIPLE-TWO RULE means there really is no such
thing as innovative financing, funding, and
delivery. There is nothing new under the sun.
Innovation is still possible, but it occurs
within a set of pre-determined boundaries that
governments cannot change. Innovation is
generally one of three types Use a
FAMILIAR TECHNIQUE differently There is nothing
new about spending tax dollars. But earmarking
taxes for infrastructure as opposed to funding
infrastructure out of general revenue is somewhat
innovative. Employ NEW TECHNIQUES There
is nothing new about borrowing. But using
tax-exempt or community bonds instead of regular
amortized debentures is innovative.
Apply traditional APPROACHES to different
assets There is nothing new about user pay
infrastructure when it comes to water treatment
and distribution. But user pay roadways
toll roads are innovative.
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The Scope for Innovation
It is also important to keep three QUALIFIERS in
mind when discussing innovative infrastructure
finance Innovation is CONTINGENT and
RELATIVE Even if a specific technique is
foreign to Canada, that technique may well have
served as standard practice elsewhere for some
time. Yesterdays innovation often becomes
todays routine practice. Innovation
occurs on a SPECTRUM Some innovations amount
to nothing more than a traditional technique
with a new name and a fresh coat of paint
re-packaged as innovation. Others are more
substantive. The most robust innovations
target TAX FUNDED infrastructure The most
innovative finance and funding techniques
uncovered by the Foundation focus on
infrastructure traditionally funded through
taxation. Innovation here seeks to
intentionally push this infrastructure into the
user pay or self-funding category.
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Traditional Financing, Funding, and Delivery
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The Traditional Process
There are numerous reasons for Canadas current
infrastructure challenge. One reason is less
than optimal choices on approach, AND the limited
range of techniques that are employed
FINANCING remains heavily tilted toward the
pay-as-you-go approach. Borrowing, whether
for operating or capital, has few
supporters. FUNDING is generally accomplished
through general taxation. Even user pay taxes
(indirect user fees) are rarely earmarked to the
infrastructure for which they should be used
(e.g., fuel taxes funding roadways).
DELIVERY is generally concentrated within
the public sector despite the many advantages
that can result from private participation.
All of this persists because it is EASY and
CONVENIENT. However, it is not necessarily
optimal, effective, efficient, or equitable. A
DIVERSE basket of techniques must be brought into
play to maximize efficiency, effectiveness, and
equity in the provision of infrastructure.
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The Traditional Process
The approaches and techniques chosen to finance,
fund, and deliver infrastructure carry HUGE
implications. They create a basket of personal
INCENTIVES that hit on the demand for
infrastructure and the ability to fund it
PAY-AS-YOU-GO Does not provide enough
up-front capital for large and expensive assets
with a long life-span and creates problems with
intergenerational equity. Borrowing can
offset the rising costs of inflation and
allows all who use infrastructure in the future
to help pay for it. GENERAL TAX FUNDING
Involves no direct financial consequences for
individuals using infrastructure. It amounts
to subsidization and results in over-use and
artificially increased demand for more
infrastructure. PUBLIC DELIVERY Provision
through public monopolies ignores the benefits
that can accrue from public-private partnerships
(PPPs). Innovative infrastructure finance sees
these approaches used ONLY when the
characteristics of an infrastructure asset
require their usage.
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A New Decision-Making Model
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A New Decision-Making Model
Across Canada, infrastructure needs clearly
outstrip the funding available. In other words,
DEMAND exceeds SUPPLY. To close this gap the
focus cannot simply rest on the supply side of
the equation more funding for more
infrastructure. The focus must be widened.
The SUSTAINABLE answer centres around
providing infrastructure efficiently,
effectively, equitably, and economically. This
requires approaches and techniques that
Help government fund an increased supply of
infrastructure Keep excessive demand in
check Maximize investments because of limited
financial resources Accomplishing these goals
requires four things Optimal decisions on
infrastructure FINANCING Effective,
efficient, and equitable sources of FUNDING
Appropriate modes of DELIVERY The right
TECHNIQUES to implement all the above
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A New Decision-Making Model
In New Tools for New Times Canada West
developed a model to facilitate better choices
and help bring supply and demand into closer
proximity Innovative decision-making
starts first by deciding on the broad APPROACH
to financing, funding, and delivery. A
second round of decision-making chooses the best
TECHNIQUE to implement the broader approach.
The model asserts that each and every
infrastructure asset possesses a number of
CHARACTERISTICS. These characteristics must
be the PRIMARY DRIVER in deciding what
approaches and techniques should be employed to
finance, fund, and deliver public
infrastructure assets.
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A New Decision-Making Model
Large Asset vs. High Up-front Costs vs. Short
Construction Period vs. Long Asset
Life vs. Complex and Technical vs. Low Future
Commitment vs. Long Payback Period vs. High
Priority Asset vs. Highly Visible vs. New
Asset vs. Integrated Network vs. Hard Economic
Asset vs. Community-wide Asset vs. Broad
Usage vs. Highly Regulated Asset vs. High
Environmental Impact vs. Marketable Asset vs.
Small Asset Low Up-front Costs Long Construction
Period Short Asset Life Simple Asset High Future
Commitment Short Payback Period Low Priority
Asset Low Visibility Existing Asset Stand-alone
System Soft Social Asset Localized
Asset Particular Usage Little Regulation Low
Environmental Impact Non-marketable Asset
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A New Decision-Making Model
?

• Large vs. Small
• High Cost vs. Low Cost
• Short Construction Period vs. Long Period
• Long Life Span vs. Short Life Span
• Complex vs. Simple
• Low Future Commitment vs. High
• Long Payback Period vs. Short Period
• High Priority vs. Low Priority
• Visible Asset vs. Non-Visible Asset
• New Asset vs. Existing Asset
• Highly Integrated vs. Stand-Alone
• Economic Asset vs. Social Asset
• Community-Wide vs. Localized
• Broad Usage vs. Particular Usage
• High Environmental Impact vs. Low Impact
• Regulated vs. Unregulated
• Marketable vs. Non-Marketable

FINANCING Pay-as-you-go OR Borrowing FUNDING
Taxation OR User Pay DELIVERY Public
Sector OR Private Sector
?
?
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A New Decision-Making Model Financing
TRADITIONAL INNOVATIVE Current Tax
Revenue Lease-Purchase Reserve Funds Cross-Border
Tax Lease Budget Surpluses Earmarked
Taxation TRADITIONAL INNOVATIVE Amortiz
ed Debenture Tax-exempt GO Bonds Loan
Guarantees Infrastructure Banks Interest Rate
Subsidies Community Bonds
PAY-AS-YOU-GO 100 Financed by Cash Even
5050 Split 100 Financed by
Debt BORROWING
?
?
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A New Decision-Making Model Funding
TRADITIONAL INNOVATIVE Personal Income Tax Tax
Incremental Finance Corporate Income Tax SPLOST
or Penny Tax Resource Royalties TRADIT
IONAL INNOVATIVE Average Cost Recovery Marginal
Cost Pricing Uniform User Fees Variable Fees Flat
Rate User Fees Congestion Pricing
TAXATION 100 Funded by Taxes Indirect User
Fees, User Pay Taxes, Fees and Tax
Subsidy 100 Financed by Fees USER PAY
?
?
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A New Decision-Making Model Delivery
TRADITIONAL INNOVATIVE Public Monopoly New
Utility Operations Corporatization
(PICs) TRADITIONAL INNOVATIVE Bid-Build S
imple DB Contracts Build-Transfer to Complex
DBFOOT TRADITIONAL INNOVATIVE Private
Monopoly Sale-Leaseback Deals Privatization
PUBLIC SECTOR 100 Public Provision Public-P
rivate-Partnership 100 Private
Provision PRIVATE SECTOR
?
?
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Diversity of Technique Is Key
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Diversity in Financing, Funding, and Delivery
There are many different types of public
infrastructure, and each asset possesses its own
unique set of characteristics. All of this
implies that governments employ a diverse set of
techniques when it comes to financing, funding,
and delivery A wider basket of financing,
funding, and delivery tools is NOT just about
more funding for more infrastructure. Rather
, governments must have a DIVERSE basket of
techniques if they are to maximize efficiency,
effectiveness, and equity in the provision of
infrastructure. Financing, funding, and
delivery options that focus on infrastructure
currently supported through taxation MUST be at
the centre of the discussion. The great bulk
of the infrastructure challenge lies in
tax-supported infrastructure (e.g., roads)
rather than infrastructure funded through user
pay systems (e.g., water, sewerage).
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Infrastructure Funding in Calgary and Edmonton
Taxation General Property Tax Business Tax
(Property-based) Franchise Fees and Utility
Taxes Other Taxes
Tax-Sharing Provincial Fuel Tax Federal Fuel
Tax Other Revenue Federal and Provincial
Grants User Fees Investment and Enterprise
Income Licenses, Permits, Fines
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Infrastructure Funding in Denver, CO
Taxation General Property Tax Franchise Fees and
Utility Taxes General Retail Sales Tax Sales Tax
on Lodging Sales Tax on Restaurants/Pubs Sales
Tax on Liquor Off-Sales Sales Tax on Car
Rentals Sales Tax on Aviation Fuel Sales Tax on
Entertainment Employee Head Tax Auto Ownership
Tax Other Taxes Real Estate Transfer Tax Almost
Any Tax Except Income
Tax-Sharing State Fuel Tax State Tobacco
Tax State Vehicle Registration Tax State Lottery
Tax Revenue Other Revenue Federal and
State Grants User Fees Investment and Enterprise
Income Licenses, Permits, Fines
36
Infrastructure Funding in Seattle, WA
Taxation General Property Tax Franchise Fees and
Utility Taxes General Retail Sales Tax Sales Tax
on Entertainment Sale Tax on Gambling Sales Tax
on Restaurants/Pubs Sales Tax on Car
Rentals Gross Receipts Business Tax Motor Vehicle
Sales Tax Real Estate Excise Tax Other
Taxes Employee Head Tax Various Business
Taxes Head Tax (Poll Tax)
Tax-Sharing State Liquor Tax State Fuel Tax State
Lodging Tax State Insurance Premium Tax State
General Retail Sales Tax State Leasehold Excise
Tax State Waste Taxes State Utility tax State
Timber Tax Other Revenue Federal and State
Grants User Fees Investment and Enterprise
Income Licenses, Permits, Fines
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PPP Sharpening the Focus
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PPP Working Definition
PPP involves the public and private sectors
working in cooperation and partnership to provide
infrastructure and services. PPP refers to a
wide range of alternative structures that fall
between conventional procurement through public
ownership on one end of the continuum to full
privatization on the other. PPPs are the middle
ground between pure public delivery on one hand
and complete private delivery on the other. PPP
is not privatization. A number of different
labels and acronyms are often attached to the
concept, often in an attempt to short-circuit
opposition. Public-private partnerships go
by PPP (Public-Private Partnership)
P-3 (Triple-P) PFI (Private Finance
Initiative) PFP (Privately Financed
Projects) PPII (Private Participation
Infrastructure Initiatives) AFP (Alternative
Finance and Procurement) If it looks like a
duck, walks like a duck, and quacks like a duck
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PPP Defining Features
PPPs come in a very wide range of models.
However, all PPP models share at least three
basic features The risks involved with
bringing infrastructure and services to the
public is shared between the public and private
sector. The financial rewards of the
endeavour are also shared. For the public
partner this comes in the form of better value
for dollars spent. For the private partner the
reward is in the form of return on
investment. The amount of reward received
relates to the amount of risk and
responsibility assumed by each partner. At
the heart of PPP is a shift in thinking about the
role of the public sector. Instead of being the
exclusive financier, owner, operator, manager,
and provider of infrastructure and services, the
public role is to facilitate, regulate, and
guarantee provision. What is important is that
infrastructure and services are provided. What
is less important is who actually does the
providing.
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PPP A Spectrum of Models
PPPs see the public sector partnering with the
private and non-profit sector to deliver both
services AND infrastructure. On the operating
side, PPP sees private and non-profit involvement
through competitive tendering to deliver
services Service
Contracts Alternative Service
Delivery Operations and
Maintenance Contracts (OM) Managed
Competition On the capital side, PPP goes
beyond the traditional bid-build and
build- transfer relationship to involve
private participation in Design
(D) Financing (F) Bu
ilding (B) Owning
(O) Operating (O) Tr
ansferring the Asset (T)
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PPP Advantages
Sharing of Risk Flexibility Specializatio
n Guarantees for Performance (e.g., on-time,
on-budget) Creating New Revenue
Streams Freeing up Public Funds for Use
Elsewhere Securing Tax Savings (i.e., indirect
subsidization) Enhanced Public
Management Competition Wider Range of
Financing and Funding Techniques Innovation
Better Pricing Models Value for Dollars
Spent The primary motivation for PPP is not cost
savings, but better value for dollars spent
through proper life-cycle asset management,
improved design, optimal asset performance,
better management, optimal risk transfer, faster
implementation, improved quality, and more
diverse techniques for financing, funding, and
delivery.
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PPP Disadvantages
High Transaction Costs Optimal Risk
Allocation is Difficult Potential for Skewing
Priorities Loss of Accountability and
Transparency Potential Loss of
Control Unresponsive to Changing Needs or
Priorities If No Savings Result, No New Fiscal
Space is Created None of these disadvantages
serve as automatic deal-breakers for pursuing
PPPs. Many of the disadvantages can be
side-stepped if PPPs are pursued in a
programmatic and methodical fashion. The process
of bringing PPP deals together needs to be
well-thought out from the very first decision to
build an asset on to the RFP stage and eventual
transfer of the asset and service back to the
public partner. The PPP process continues to be
refined and improved as public and private sector
experience with PPP moves forward.
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PPP Winning Conditions
Focus on the Big Picture Commit to
Accountability Properly Allocate
Risk Select the Right Projects Realistic
Expectations Communicate Effectively Establi
sh Deal Flow Establish Incentives
Continually Evaluate
No Indiscriminate Guarantees Strong Public
Sector Comparator (PSC) Secure Expertise
Experience Establish a Successful Track
Record Align Legislation that Impacts on
PPP Governments Must Stay Active Make a
Programmatic Commitment Standardize the PPP
Process Ensure Competition Exists
Success with PPP is not for the faint of heart.
Successfully employing PPP across the public
sector requires significant effort in terms of
building expertise and institutional capacity.
Pursuing PPP in an ad hoc and tentative way
increases the chances for crash and burn
scenarios. Without a long-term and programmatic
commitment, the private sector will not invest
the resources to participate in PPP as well.
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PPP Reality Check
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PPP Reality Check
The PPP concept was conceived in the UK and has
since been exported around the world. The UK
continues to be the biggest user of PPP. A quick
review of the British experience helps keep the
debate over PPP in context. In 2003, the
total value of all investments in public
infrastructure in the UK was 1.75 of GDP.
Without PPP projects, the total value of
investment would be 1.50. Thus, PPPs in the
UK account for only 15 of total public
infrastructure investment. Furthermore, the
total value of all PPP projects in the UK has
been heavily influenced by three very large
multi-billion dollar projects the London
Underground, the Channel Tunnel, and the
Channel Tunnel Rail Link. In 2003, 70 of
all signed PPP deals in the EU were in the UK.
Of that amount, one- quarter of the value was
in the London Underground Project. Regardless
of the all the hype surrounding PPP, the process
currently touches only a small share of public
infrastructure. To be sure, that may change in
the future
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PPP Reality Check
The National Accounting Office (NAO) in the UK
estimates that PPP has yielded an average
savings rate of 17 compared to traditional
public sector procurement. With 15 of UK
infrastructure under PPP arrangements, what
would the potential savings look like for the
City of Calgary? Calgary 2007 Capital
Expenditure 1.025 Billion Potenti
al Savings From PPP 26.1
Million Very aggressive PPP programs for
public service delivery like those in
Indianapolis and Phoenix have resulted in a 10
savings across the entire operating budget.
Calgary 2007 Operating Expenditures
1.650 Billion Potential Savings From PPP
165 Million
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Conclusion
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Conclusion
Governments could start building their
programmatic commitment to PPP by focusing on
the simpler forms first. In the UK, experience
with current and very complex PPP structures
trace their history all the way back to earlier
innovations in service delivery undertaken by
the Thatcher government in the 1980s. PPP
structures like service contracts, ASD, and OM
contracts were the starting point. Once
experience on the service delivery side is
learned, a base of expertise is built to
advance the PPP concept into infrastructure
investment. If Canadas governments have
difficulty defending and handling relatively
simple arrangements like a standard OM
contract, they will not get very far with
full-blown DFBOOT arrangements. Do not forget
that PPP is only ONE innovation in a much larger
buffet!
49
New Times, New Tools Innovation in
Infrastructure Financing, Funding, and Delivery
Casey G. Vander Ploeg, Senior Policy Analyst,
Canada West Foundation. A Presentation to the
Partnering for Public Infrastructure
Conference, May 12, 2008, Toronto, Ontario