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VALUE FOR FUNDING (VfF) APPROACH TO ASSESSING LONG-TERM INFRASTRUCTURE INVESTMENT DECISIONS

TitleVALUE FOR FUNDING (VfF) APPROACH TO ASSESSING LONG-TERM INFRASTRUCTURE INVESTMENT DECISIONS
Publication TypeWorking Paper
Year of Publication2017
AuthorsKim, J, Ryan, J
KeywordsWorking Paper
Abstract

Long-term infrastructure investment decisions are among the most critical challenges facing the U.S. state and local governments today. The particular choice of infrastructure financing will have important bearing on how far governments can stretch their constrained revenue base and on their overall fiscal health in the long run. Value for Money (VfM) is an existing standard tool that allows a comparative analysis of alternative financing options, including public-private partnerships (P3s). Although used widely, VfM has several limitations as a practical decision support tool for policymakers. While it considers the relative merits of different financing options at the project level, VfM is critically limited in its lack of consideration for project revenue funding needs (to repay the financing) and the resulting impact on the overall fiscal constraints faced by the local and state project sponsors. The proposed Value for Funding (VfF) model is designed to address these shortcomings by explicitly measuring the impact of infrastructure investment decisions on the project sponsors’ ability to meet their fiscal obligations in the long run, including budget deficit and funding volatility risk effects over the project’s life. Recognizing the increasing need to deal with fiscal volatilities, VfF explicitly models the inherent uncertainties through a stochastic framework. This new framework will enable government sponsors to gain new insights into the fiscal risks involved in their infrastructure decisions, in particular, with availability payment (AP) based public-private partnerships (P3s) where the long-term repayment obligations directly dip into the sponsors’ general funds.

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