There are three defining characteristics of project revenue that are relevant to private investors:
1. Fixed or variable: the revenues are either largely fixed, and based on the availability of the infrastructure, possibly with some known performance measures; or they are variable, based on the level of usage or volume.
2. Contracted or user-pay based: the revenues are either contracted, typically over a long period; or they are based on a user-pays basis, with no certainty of demand or how they will build over time.
Case in Point 1: Transport Infrastructure Finance & Innovation Act (TIFIA) Funding |
The TIFIA act was established in 1998 as a US federal credit program for eligible transportation projects of national or regional significance. The program is run under the US Department of Transportation (DOT), and offers three types of financial assistance: secured or direct loans, loan guarantees, and standby lines of credit. The goal of the program is to leverage federal funds by attracting substantial private and other non-federal investments in a bid to improve the transportation system in the United States. Some of the key features of TIFIA credit assistance are the provision of improved access to capital markets; flexible repayment terms, such as delayed repayment for up to five years after construction completion; and potentially more favorable interest rates than can be found in private capital markets for similar instruments. US$122 million has been authorized for each fiscal year from 2005 through 2009. This level of funding can support more than US$2 billion of average annual credit assistance. The amount of federal credit assistance may not exceed 33 percent of total project costs, and DOT has to establish a capital reserve to cover expected credit losses before it can provide TIFIA assistance. Total TIFIA assistance thus far has been US$7.7 billion, which has supported projects with a combined cost of US$29 billion. The availability of this government support has been crucial in allowing some projects to reach financial close during the recent global economic crisis. Examples of TIFIA assistance include the I-595 corridor roadway improvement in Florida (TIFIA loan of US$603 million), the Port of Miami Tunnel (TIFIA loan of US$341 million), the Washington Metro Capital Improvement Program (TIFIA loan guarantee of US$600 million), the Warwick Intermodal Station (TIFIA loan of US$42 million), and the Central Texas Turnpike (TIFIA loan of US$900 million). |
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3. Upfront or periodic payment: revenue receipts are either receivable in full as soon as the asset is commissioned or there is a period of build up over a number of months or years.
The third characteristic is a feature of new market-based infrastructure, where there is no track record of usage-such as a new toll road on a new route. This type of infrastructure requires private financiers to make an educated guess on the build up and final level of usage of the asset, as well as on the unit price or toll the user is willing to pay. The accuracy of these guesses influences the project's ability to service debt during this build-up period, and the overall debt capacity of the project.
Broadly speaking, the lower-risk revenues are those that are availability-based with long-term contracts; on the other end of the risk spectrum are situations that provide a new service, with patronage building up over a few years and where revenue is entirely based on user fees. The higher risk may mean there are fewer potential investors and those who are interested will seek a higher return for taking on that risk. Recognizing some of the challenges of attracting private finance to projects at the higher risk end of the revenue spectrum is critical. There are examples of government funding to help mitigate some of these risks: see, for example, the US TIFIA funding (see Case in Point 1) and how it was applied to the Florida I-595 project (see Case Study 9).
An alternative to a solely private financed solution might be a mixed public and private funding solution. This approach can raise some complex contractual issues in order to deal with the inter-relationship between the two funding sources. However, these issues are not insurmountable, as illustrated by the approach taken to fund the Canada Line in Vancouver, Canada (see Case Study 10).