PLANNING AND FINANCE SERIES: Canadian resource gives comprehensive overview of capital financing strategies

PLANNING AND FINANCE SERIES: Canadian resource gives comprehensive overview of capital financing strategies

by Patrick L. Dugan, Everett, Washington

I recently was invited to make a couple of presentations to the 2012 Manitoba Planning Conference. Since my understanding of Canadian finance is quite limited, I have spent some time searching the web for useful insights to how the Canadians do their business. Through this process, I have come across a comprehensive overview of the complexities of financing capital improvements: New Tools for New Times: A Sourcebook for the Financing, Funding and Delivery of Urban Infrastructure, by Casey Vander Ploeg published by the Canadian West Foundation, September 2006. I recommend this resource to any planner who is interested in getting either an overview of capital finance or developing an in-depth knowledge of various options and strategies for financing capital facilities.


Overview of the report

While this document is written for Canadian audiences and requires some adjustment to differences in terminology (they say “debentures,” we say “bonds”) and public financial systems, it serves as an excellent overview of the full range of the ways that capital facilities may be financed and the advantages and disadvantages of various strategies and financing instruments. It not only has a wealth of detail (making it an excellent reference manual), but it also is quite useful in summarizing the complexities of capital financing and in identifying viable funding strategies. 

The objective of the report appears to be to offer practitioners help on not only how to use “traditional” forms of financing, but also to suggest ways that these traditional methods can be added to and enhanced with more innovative strategies. In my career, I have encountered a lot of materials that pay lip-service to “innovative financing”, but this is one of the few reports that I have run across that provides a very practical understanding to how one might actually be innovative.

The report is divided into two parts. The first part looks at capital finance from a broad perspective, exploring overall issues and strategies. The second part presents a detailed taxonomy of infrastructure financing, exploring in detail the myriad of potential financing instruments that not only may be available currently for use, as well as even suggesting more creative strategies.  

Triple-Two Rule

As an example of the way the report is adept at conceptualizing complex systems, it provides what the author calls the “Triple-two Rule.” This concept provides a very useful way of thinking about the array of capital financing strategies. In the Triple-two Rule, “there are only two basic methods of financing infrastructure, two basic methods of funding that financing, and two basic methods of delivering or constructing infrastructure.”

The two ways of financing infrastructure are either by using reserves and current revenue flows to finance the facility (this is known to finance officials as “Pay-AsYou-Go”), or by borrowing funds to build the facility and paying back the loan later. The report not only details the pros and cons of each strategy and suggests the most appropriate use of each, the report also details all the various ways fiscal resources can be managed to use the “pay as you go” method, and the various ways that local governments may borrow to finance facilities.

The two ways to fund the financing are either with general tax revenues or from user fees or charges on the private sector. Again, the report explores the advantages and disadvantages of each overall approach, and then explores the advantages and disadvantages of various types of general tax revenue and the pros and cons of different user fees and charges that could be used for generating revenue. 

The two ways of delivering the infrastructure consist of either having the public sector construct the facility or having the private sector construct the facility. Again, the report explores the advantages and disadvantages of each overall approach and the specific ways that this construction might be completed by either the public sector or private sector.

Conclusion

The report notes, “The current methods of financing, funding, delivering and maintaining urban infrastructure are insufficient and inadequate, as is evidenced by Canada’s mounting urban infrastructure debt.” The same might be said for capital finance in the United States. The American Society of Civil Engineers has estimated the infrastructure deficit in the United States over the next five years could be in excess of one trillion dollars. 

In response, the report advocates using a diversity of strategies that combine both traditional approaches to finance and more innovative strategies. In particular, the report advocates that there be a shift from the traditional reliance on general tax revenues to finance facilities to providing necessary funds through more user fees and charges. While much of the specific advice the report provides may be only applicable to Canada, the general strategies advocated are applicable to much of the capital financing challenges confronting cities in the United States.

As the executive summary of the report states, “New Tools for New Times is a one stop shop for information on both traditional and innovative infrastructure financing, funding and delivery tools.” Resources of this caliber on the arcane subject of capital finance are hard to find and this report should be in the reference library for planners involved in capital finance in either the United States or Canada.

Patrick L. Dugan has been a city planning director and a city finance director. During the last 30 years, he has held various financial and planning positions in cities, counties, and regional agencies in three states. He has shared his views on public finance and planning with articles in The Western Planner since 1995. Now a private consultant in Washington, he can be reached at consult.dugan@frontier.com.

Endnotes

  1. http://cwf.ca/pdf-docs/publications/New-Tools-for-New-Times-September-2006.pdf
  2. http://newamerica.net/publications/policy/the_infrastructure_deficit E

 

Print Friendly and PDF Email this page