The Buck Starts Here

The capital project development process needs early consideration of revenue and finance.
May 20, 2016
By Jen Mayer  |  Contributor
Leader of the City Accelerator's cohort on planning and funding urban infrastructure

As City Accelerator Cohort 3, focused on supporting cities to fully implement their five-year city infrastructure plans, with particular attention to projects that will have an impact on low-income residents, kicked off its 18-month journey in Denver, the cohort cities engaged in an interactive exercise looking at how and when revenue and finance tools were brought into the capital planning process.

Why was this a topic of interest? At the earliest stages of project development, it is common to do sketch-level engineering, cost estimates, planning and get a general idea of many project aspects that get refined in later stages. It is not always common to sketch out potential revenue sources and financing options at the earliest stage. Instead, revenue and finance is often something that is pasted on at the back end of the process, after projects are fully designed and prioritized.

It is relatively rare for cities to evaluate each project in its pipeline for its individual revenue potential, and for the potential for financial and delivery innovation (unless the project is obviously and initially based on a potentially revenue-generating asset, such as a utility plant or stadium).

Why doesn’t this happen? First of all, staff that might have the expertise on revenue potential and/or finance and delivery options sometimes don’t get involved in the earliest stages of project development. Second, financial capacity may be evaluated on a programmatic, rather than a project level. Sometimes cities develop an estimate for total financial capacity, and then every project fights to be prioritized under that cap. That system doesn’t incentivize the consideration of revenue and finance options early in the process.

This can mean a lot of delays and missed opportunities. Street improvements could partially pay for themselves with tax increment financing, crowdfunding or a myriad of sources – particularly if the project is designed with these in mind. If you loop a potential developer in when you design a facility, you might find that where you place a bus stop or stormwater feature could increase land value – value that could return to help pay for the investment. Public-private partnerships might have potential for certain projects – but if they get too far advanced in design, the private sector may not be able to leverage any innovations. Also, if private involvement is considered after the public outreach has occurred, the city may not have the opportunity to vet potential partnerships with the community, or may have to re-do outreach and engagement work and environmental studies to reflect incorporation of a new funding strategy. Thus, bringing early consideration of revenue and finance tools, that gets refined throughout the process, can ensure that the entire plan is optimized.

How can cities ensure that these considerations are examined earlier in the process?

  • Provide widespread training on revenue and finance options to staff involved in project development.

    Staff members don’t need to be revenue or finance experts to speculate whether a project might  benefit from an innovative finance tool. Just having some idea of what tools are out there could enable project development staff in city public works departments to float ideas about possible revenue and finance sources.  

  • Include leveraging of funds as a criterion in capital planning.

    To incentivize early consideration of revenue and finance potential, cities can make leveraging of other funds a criterion for inclusion in the capital plan. For example, the city of Denver considers how well a project leverages non-city funds as one of several factors that determine whether a project will ultimately be included in the capital plan. Just asking the question as part of the project development process can initiate ideas and encourage project proponents to be creative.

  • Establish a predevelopment revolving fund.

    Some cities lack the funding to do adequate investigation of possible revenue sources or financial tools early enough in the process to use them for financing. 

At the cohort kickoff, we learned that the city and county of San Francisco has established a predevelopment revolving fund.The fund pays for predevelopment costs such as revenue feasibility studies that help bring projects to financing. When a bond issuance happens, these predevelopment costs are reimbursed to the fund, and it is available for developing the next project.
 
Some cities are reluctant to consider revenue and finance potential early, because they fear that it will devolve into a “winner-take-all” process in which projects that come with their own funding get an express lane to selection and ultimate inclusion in the capital plan. There would be significant environmental justice and equity concerns if a system allowed projects in higher income neighborhoods to advance faster because they can come up with more funding. However, if some projects could contribute revenue,  they can increase the capacity to fund the projects that can’t. There are also legitimate concerns about providing too much control to the private sector over public purpose projects. The trick is to incentivize innovation without compromising on the public goals that the projects seek to deliver. 
 

Be part of the campaign for civic innovation at the City Accelerator, presented by Citi Foundation.