Value Capture: A Valid Means of Funding PPPs?

• DOI: http://doi.org/10.1111/faam.12083
• Published date: 01 May 2016
• Date: 01 May 2016
• Author: Anthony Wall,Ciaran Connolly

Financial Accountability & Management, 32(2), May 2016, 0267-4424

Value Capture: A Valid Means of

Funding PPPs?

CIARAN CONNOLLY AND ANTHONY WALL∗

Abstract: This paper considers the use of value capture (VC) as a means of

financing public-private partnerships (PPPs) in the United Kingdom (UK). Although

some VC techniques are used in the UK, they are employed more widely in the United

States of America. After considering the traditional approach to financing UK PPPs,

this paper describes the main VC finance instruments. The findings of a series of

case studies are then presented and conclusions drawn. While VC financing may

prove unpopular with those bearing the cost of infrastructure improvements, it is

recommended that such instruments are considered by UK policy makers.

Keywords: value capture, public-private partnerships, infrastructure improvements

INTRODUCTION

The funding of infrastructure projects has become increasingly complex,

particularly in the last two decades. Previously, such projects were typically

funded directly by government, with contributions from users either directly

or indirectly (e.g., with respect to transit-related projects through fares, fuel

taxes and vehicle registration). The issue of who should pay is important, and

if the paradigm is that improvements only result in increased user convenience

then users should bear the cost. However, the benefits are often wider (e.g.,

new schools or improved transit links may lead to capital gains accruing to

property owners). Moreover, the financing issue is complicated by factors such

as environmental impact costs and to what extent these should be borne by

future generations.

Recent years have seen greater private sector involvement in the funding of

public sector infrastructure projects, together with their design, construction and

operation through Private Finance Initiative (PFI)/Public Private Partnership

∗The authors are respectively from Queen’s University Belfast and the University of Ulster.

Address for correspondence: Ciaran Connolly, Queen’s University Management School,

Queen’s University Belfast, 185 Stranmillis Road, Belfast BT9 5EE, Northern Ireland.

e-mail: c.j.connolly@qub.ac.uk

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(PPP) contracts. Although there are a variety of arrangements that fall

under the PPP umbrella, the most controversial remain those containing PFI

characteristics. The use of private money to finance public sector infrastructure,

such as schools and hospitals, was deemed to be flawed from the outset as public

money was cheaper to borrow. However, the proponents of utilising private

funding maintained that efficiencies gained in the construction and operating

phases of the contract would compensate for higher interest rates. Moreover, the

availability of private finance meant more projects could be undertaken than

under conventional procurement; although this latter argument is weakened

with the economic recession and the reluctance of banks to lend.

This paper examines value capture (VC), a method employed in the United

States of America (USA) which has gained popularity in recent years, particularly

with respect to the repayment of transit PPP finance, because it is perceived

as being socially equitable since it transfers some of the financial burden to

users and others who will benefit from the new or improved infrastructure.

In terms of format, the paper begins with an overview of the financing of

PPPs. This is followed by a discussion of value creation and VC, including the

main VC instruments. After outlining the methodology, four case studies that

have employed various VC instruments are presented and discussed. Finally,

conclusions are drawn.

THE FINANCING OF PUBLIC PRIVATE PARTNERSHIPS

Criticising the use of PPPs, and its forerunner the PFI, has been the focus of

many UK studies (e.g., Edwards and Shaoul, 2003; Broadbent et al., 2008; and

Pollock and Price, 2008). The number and value of UK projects grew steadily

until 2007 (Her Majesty’s Treasury (HMT), 2006) when the banking crisis began

to impact upon lending. Traditionally, major PPP projects that availed of private

finance used a combination of debt and equity with their respective mix typically

being 90% and 10%.1Initially, the debt consisted of bank lending and bonds, the

latter being backed by the monoline industry2which guaranteed repayment if

an issuer defaulted. However, following the 2007 housing market decline, this

industry collapsed resulting in the closure of the wrapped bond market (BBC,

2009). Consequently, the only viable source of finance for infrastructure projects

was banks; however, the demise of Lehman Brothers in September 2008 meant

the global lending market dried up as interbank confidence fell (Connolly and

Wall, 2011).

Notwithstanding the aforementioned criticisms, two significant characteris-

tics of PFI may explain its ongoing attractiveness (Gregory and Dawber, 2012).

Firstly, while accounting rule changes mean most projects now appear ‘on

balance sheet’ in accounting terms, the liabilities are excluded from calculations

of overall public sector net debt and a PFI deal has less immediate impact on

a public body’s capital budget than a traditionally-procured project. Secondly,

while not without its complications, PFI is relatively straightforward, especially

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