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Finance and Contracts

Author Henri Chua (IM Technologies Ltd., UK)

The deployment of ITS projects requires visionary strategic planning and sound project appraisal. Strategic planning sets the vision and roadmap. (See Strategic Planning) Project appraisal sifts and ranks beneficial projects competing for scarce resources to inform the investment decision. (See Project Appraisal) In a continuous planning and deployment process, an effective approach to implementing project(s) is required to secure best value for money.

It is important to address the factors that underpin the appropriate procurement decision. In other words, having judged that an ITS project represents a sound investment because its benefits are assessed to far outweigh expected costs - how should the project be procured and implemented? This involves:

DIFFERENTIATING FUNDING FROM FINANCING

Funding is defined by the Concise Oxford Dictionary as "a sum of money made available for a particular purpose". It is often confusingly and unhelpfully used interchangeably with financing - which is better defined as "providing funding".

PIARC Technical Committee A2 Financing, Managing and Contracting Road System Investment 2008-2011 clarified by defining "financing" as "provision of the capital to cover the cost of an investment project" whereas "funding" as "provision of financial resources by the public sector, aid donors, users (taxpayers, and toll payers) and/or other beneficiaries for an investment project".

PIARC Terminologies gives the full definitions of funding and financing.

  • Funding: provision of financial resources by the public sector, aid donors, users (taxpayers, and toll payers) and/or other beneficiaries for an investment project.
  • Financing: provision of the capital to cover the cost of an investment project.

This differentiation is particularly helpful in clarifying stakeholder responsibilities, mapping out cash-flow timings, pinpointing underlying causes of delay or failure in deployment, and developing and progressing a portfolio of beneficial projects that are affordable.

Funding

Funding is provided by a government, a similar public-sector body, aid donors and/or users (taxpayers, and toll payers) in order to procure an infrastructure or a service. Other beneficiaries may also contribute to funding if they derive value from the investment (for example, a land owner contributing to the cost of building a new road in the expectation that the value of the land will increase when the new road is open). For government-funded projects there is not usually an expectation that the funding will be repaid as there would be an expected benefit to taxpayers or other beneficiaries. Even when there is an expectation, usually it will be repaid after many, many years with no or little interest. In the specific case of a road procured as a Public-Private Partnership (PPP), the private partner having contributed to the construction and operation of the road should ensure sufficient funding from the public sector and/or users for his contribution to be repaid.

 

Financing

Capital is sourced from a variety of mechanisms: Government budget allocation, grant by aid donors, equity provided by shareholders, or loan provided by investors.
Financing is provided in the expectation that the equity or debt will be repaid, along with a return on capital commensurate with the risks involved, over a specific period through payments by the users (taxes, tolls) and/or by the public sector.
In the case of a road or ITS project procured as a Public-Private Partnership (PPP), financing is totally or partly provided by the private partners involved and repaid with the return on investment.

 

 
Reference sources

PIARC Technical Committee A.2 (2012) Financing, Contracting and Managing of Road System Investment PIARC Report 2012R08EN Paris. Available for download at: http://www.piarc.org/en/publications/search/

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