Design-Build With Finance - Design-Build for Water and Wastewater Projects - page 319

27
Design-Build With Finance
Patrick E. Gallagher, JD, Camp Dresser & McKee Inc., and
James E. Bolno, MBA, MGA, Philadelphia Water Department
INTRODUCTION
Financing for the capital cost of municipal water and wastewater projects in the United
States is typically provided by tax-exempt bonds, which are long-term debt obligations
of the municipality where interest payments made to the bondholder (i.e., lender) are
excluded from the lender's federal income tax. Most water and wastewater projects have
dedicated revenues, and their tax-exempt bonds may take the form of a revenue bond
(i.e., payable only from user charge revenue) or a general obligation bond (i.e., payable
out of the municipality's general tax revenues). In other instances, tax-exempt bonds are
issued at the state level to create a central fund (i.e., state revolving funds; SRF) to pro-
vide tax-exempt loans to municipalities. In some states, the SRF loans are subsidized and
offer interest rates that are below market rates. The combination of tax-exempt interest,
well-developed primary and secondary capital markets, and strong credit (i.e., low default
risk) means that bonds generally provide municipalities with a readily available, low-cost
source of funds. This is the most common form of financing for water and wastewater
projects in the United States.
An alternative to municipal bonds or SRF loans is contractor-provided financing.
While there is a variety of mechanisms and structures for contractor financing, a common
approach by municipalities that seek alternative financing is referred to as project financ-
ing . This is where the project's participants, costs, risks, and revenues are organized and
bound together in a project-based arrangement of contractual obligations. This, however,
is not typically done by DB contractors for water and wastewater projects, where the con-
tractor has no role in long-term operations. When financing is provided by DB contrac-
tors (such as in highway projects), it generally reflects a lease type of arrangement whereby
fixed payments are made for a fixed term upon successful completion of the project.
This chapter provides an overview of finance for DB projects (DBF) and for DBO
projects (DBOF).
319