THE FUNDAMENTALS OF PROJECT FINANCING
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Borrowing money is easy; paying it back is the hard part.

While money for water and sewer projects is generally available, many factors must be taken into consideration when evaluating project affordability: interest rates, repayment terms, loan conditions, and program flexibility. This is especially true if funding from a number of sources is to be combined to fund a single project.

Too often, a financial strategy is adopted because "that is how a neighboring system was financed" or because a particular program or method enjoys popularity at the moment. Although your professional advisors will research various programs, their efforts will be guided by the direction you, as the authority board, have given.

It is important that each board member keep an open mind and be aware that each financial package will contain both positive and negative elements. There is no single “best way” to finance a project, so each financing package should be compared to the project goals established by the authority. Yes, it is entirely possible that, under certain conditions, a public bond issue is more cost-effective than a public agency's subsidized interest rate loan. It is also possible that grants may not always lower project costs or result in lower annual user fees. This may seem like heresy, but it is true for many reasons: changes in federal and state programs, the keen competition for limited funds, and administrative requirements that always accompany funding from governmental agencies. For this reason, we must all take a fresh look at how major capital projects are financed.

This isn't Kansas anymore, Dorothy.

Based on my theory that a dollar saved is the same as a dollar grant, it is important to completely and carefully review the project that is to be undertaken. If there is any question concerning the scope of the project (such as whether it is too large or too small), it is important to go back and take a hard look at the economics of changing the project size. Opportunities to lower user costs by slightly expanding the project into another neighborhood or perhaps a neighboring community are sometimes overlooked. Undertaking the maximum project on the theory that funding for another project would likely become available can also increase costs. While these are legitimate concerns, their impact should be quantified by looking at the cost per user of a project that considers new areas or does not provide service to areas where it is not cost-effective. Other factors to consider are summarized in the sections below:

• Choosing the most appropriate timing for your project
• Deciding on the type and amount of capital charges you should impose
• Using front foot/benefit assessments to finance sewer and water mains
• Obtaining developer contributions to reduce project cost

© 2008 Herbert, Rowland & Grubic, Inc.