Mitigating Financing of Major Public Infrastructure Projects: Bidding by Net Present Value (NPV)

The construction of major public infrastructure projects requires long term investment of substantial amounts of working capital and the financing costs is a major risk that is mostly shouldered by the contractors. The financing capabilities and high level of risk results in limiting competition and the higher financing cost will eventually be paid by the project owner and adds up to the total project capital cost. This paper will examine the financing cost of major public projects and will explore methods that can be adopted to shift the financing burden and the risk to the party that is most capable to manage it. The authors will introduce methods to measure project cost elements that are contributing to the financing cost of the project. They will illustrate that the inclusion of the time-value of money in the bid evaluation process is the vehicle for measuring the financing cost of the project that allows equitable shifting of the financing risk to the owner, thus reducing the financing cost, increasing competition and reducing total project capital cost. The entire contracting methodology, financing and construction process in the twenty first century requires a fresh approach that ultimately leads to the best possible project for the best possible price. Letting contracts out based upon the net present value is just such an approach.