COST ALLOCATION IN URBAN

INFRASTRUCTURE FuNDING
By Andrew R. Watkins!

ABSTRACT: This paper develops a methodology for allocating infrastructure costs

over the community, which uses it or in some way benefits from it. By allowing
in a quantitative fashion for the value judgments that form part of the allocation
process, and by establishing links between the various beneficiary groups and the
funding mechanisms available to the infrastructure provider, a consistent allocation
framework has been developed that provides clear-cut charging regimes for infra-
structure provision.
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INTRODUCTION
The effects of urban infrastructure funding on communities or parts of
communities are matters of considerable interest to planners and govern-
ments. Distributional, efficiency, and other impacts of infrastructure funding
will be determined by the funding regime that is used-in other words, by
the split of infrastructure costs among the people who consume or in some
way benefit from the services it provides and the way in which these costs
are recovered.
Even though it frequently appears explicitly or implicitly in studies of
urban infrastructure funding, the question of deriving a sensible rationale for
this split has received surprisingly little attention in the literature on urban
infrastructure. The need to allocate costs among distinct groups has been
mentioned in a number of studies-for example, the allocation of arterial
road costs between the commuters to and from work, the industries that
employ the commuters, and other users (Watson 1996), or the allocation of
impact fees in Florida between the new development and individuals outside
the development (Nicholas 1985)-but has not been studied any further, here
or elsewhere (Rau 1985; Toft 1985; Nicholas and Nelson 1988; Spiller 1993;
Neutze 1995).
This lack of interest may be due to the fact that traditionally infrastructure
provision has been the role of government and its agencies, who have been
able to call on a range of well-established funding mechanisms (taxes, rates)
that spread the funding burden thinly over a large number of people and are
therefore relatively noncontroversial.
Recent developments in infrastructure provision have, however, made the
funding question at once more complex and more contentious. A wider range
of funding mechanisms (the most notable being "user pays" charging de-
vices) are now accepted by the community, and the increasing role of the
private sector in providing infrastructure has sharply reduced the reliance that
can be placed on relatively broad government taxes and charges to fund
infrastructure. The question of who needs the infrastructure and who should
pay for it has assumed an increasing importance, and the onus is now on the

IRes. Economist, Dept. of Infrastructure, Nauru House, 80 Collins St., Melbourne,

Victoria 3000, Australia.
Note. Discussion open until August I, 1998. To extend the closing date one month,
a written request must be filed with the ASCE Manager of Journals. The manuscript
for this paper was submitted for review and possible publication on October I, 1997.
This paper is part of the Journal of Urban Planning and Development, Vol. 124,
No.1, March, 1998. ©ASCE, ISSN 0733-9488/98/0001-0044-0053/$4.00 + $.25
per page. Paper No. 16713.
44/ JOURNAL OF URBAN PLANNING AND DEVELOPMENT / MARCH 1998

J. Urban Plann. Dev. 1998.124:44-53.

 infrastructure provider to identify those groups in the community who benefit
from the infrastructure and, in the light of this, to allocate the costs of the
infrastructure among these groups in some acceptable and defensible way
(see e.g., Moore and Muller 1991).
Justifying a particular cost allocation regime often involves assessing the
benefits that flow from the infrastructure. Traditionally, cost-benefit analysis
has been used to assess the benefits (as well as costs) of the infrastructure
projects (Squire and van der Tak 1975), but considerable controversy sur-
rounds the various methodologies available, and the difficulties are com-
pounded when the question of allowing for different individual preferences
arises in assessing benefits. A good discussion of this can be found in Pearce
and Nash (1981).
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Under these circumstances, it seemed appropriate to take a somewhat dif-

ferent approach in looking at the allocation of infrastructure costs. Cost-
benefit studies typically focus on the variations in preferences of individuals
and assume that the benefit itself is uniformly distributed over all individuals.
In this paper I put the question of individual preferences to one side and
concern myself with benefits insofar as they define the individuals or groups
who can reasonably be expected to pay for the infrastructure, and as a guide
(but not the only one) to the share of costs they should pay, based on the
different levels of benefit (due to their location, age, family circumstances,
and so on) they receive.
For example, not all people in the community derive equal benefit from
the construction of a child care center or a library. Families with young
children and readers living in reasonable proximity to the library would log-
ically receive greater benefits from the facilities than those living farther
away, whereas those living in another city would derive no benefit at all. The
community-and hence the infrastructure authority-might take the view
that it would be unfair to burden these groups equally with the cost of the
facilities, and would allocate the costs, implicitly or explicitly, in accordance
with the benefits (if any) received by the various beneficiary groups; the
benefit principle (Bird 1976, Chapter 2).
However, this is not the only way of allocating infrastructure costs. Another
community might feel that different criteria, such as sharing the cost of the
facility equally over all members of the community regardless of benefit or
having only those beneficiaries who are direct users pay for it, are more
appropriate. This introduces the idea that community values, which reflect
the aims and perceptions of the community, will play an important part in
determining the way in which costs are allocated among the beneficiaries.
These value judgements are in effect a consensus, whether explicit or implicit,
of community attitudes and aspirations, tempered in some cases by the po-
litical and bureaucratic process, and will inevitably determine the choice of
allocation criteria or (equivalently) the respective weightings they receive in
the cost allocation process.
There is, furthermore, a second issue of almost equal importance that has
received no mention in the literature: in the real world, cost recovery mech-
anisms are imperfect, because they may fail to extract the appropriate pay-
ment from the appropriate people. Typically, infrastructure authorities have
available to them a range of possible cost recovery mechanisms; grants from
state and federal governments that come from taxes levied on the larger
community (including taxes earmarked for special projects, such as gasoline
taxes for road building), rates (including special rates and specific rates, such
as water rates), various types of user pays charges (such as access fees and
consumption fees for electricity and water), taxes on land development (de-
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J. Urban Plann. Dev. 1998.124:44-53.

 velopment contributions), and miscellaneous sources of income such as do-
nations, interest from invested funds, and special charges.
These cost recovery mechanisms will not necessarily be very effective in
targeting beneficiary groups of interest. Funding a road from federal taxes,
for example, spread the cost burden not only over the users of the road but
also over the whole community, an outcome that will not be desired by a
road authority wishing to base its infrastructure funding policies on user pays
principles. Again, funding a library through rates will not differentiate be-
tween users and nonusers of the library. The various cost-recovery mecha-
nisms available to infrastructure authorities for extracting money from the
community are thus not always effective ways of taxing specific beneficiary
groups, and funding policies should recognize this.
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This paper sets out to explore these issues and, in doing so, develops a
cost allocation methodology with a strong practical focus that factors in the
two matters discussed in the preceding section; a community's value judg-
ments and imperfections in funding mechanisms.

METHODOLOGY
My approach in this paper was to break down the cost allocation decision
into a number of logical steps. The first of these was the identification of the
beneficiary groups. These are distinct groupings of people who in some way
benefit from the presence of the infrastructure (Nicholas et at. 1991, Chapter
II); these groups in the urban planning context are often equated with benefit
districts based on the rational nexus test (Roberts 1985). Included were those
who make direct use of the infrastructure, as well as those who benefit from
(or are disadvantaged by) the presence of the infrastructure without being
direct users. A road, for example, will confer benefits on several beneficiary
groups; on the people living in its immediate proximity and who can be
expected to be frequent users of the road, on people farther away who use
the road less frequently, and possibly on persons who, although they do not
use the road at all, nevertheless experience a rise in property values (benefits)
or an increase in noise (disbenefits) from the proximity of the road.
The second step was to assess the cost shares appropriate to each criterion
(Moore and Muller 1991). For each criterion there will be a different set of
shares covering the beneficiary groups, reflecting the different implications
of the criterion for the cost allocation process. For example, the infrastructure
costs can be distributed according to the size of the benefits received-the
rational nexus test (Roberts 1985; Moore and Muller 1991; Nelson et al.
1990) or, alternatively, they can be distributed on a user-pays criterion, where
costs are recovered solely from the direct users of the infrastructure facility
(whose consumption can be influenced by price signals), with nonusers con-
tributing nothing, even though they may derive some other benefit from the
presence of the infrastructure. Again, the infrastructure costs could be spread
evenly over all beneficiaries, regardless of the magnitude of the benefit they
receive or whether they are direct users or not. There are many possibilities,
and for each of these criteria there will be a different set of cost shares for
the beneficiary groups.
I designated the shares of the infrastructure cost to be met by each of N
beneficiary groups under the first criterion as: su, S2h ••• , SN\; the shares
under the second criterion as SI2, S22, ••• , Sm, and so on. These shares can
be summarized in an N X M matrix S, each element of which gives a measure
of the cost share of a particular beneficiary group for each one of the M
funding criteria
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J. Urban Plann. Dev. 1998.124:44-53.

 S
[,,,
$21

= ~~~
$\2

$22
$32
$13
$23

$33
$14
$24

$34
'
$2M

$3M
..]
$N1 $HZ $NJ $N4 $NM

The relative importance of these criteria, however, will depend on the

community's values, as discussed above. The third step, therefore, is for the
infrastructure authority to take account of the relative importance to the com-
munity of the criteria by assigning weights w .. W 2, ••• , WM to the M criteria.
This can be represented as a vector w
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Although I now have the means to decide which beneficiary groups bear
what part of the cost, in practice, as mentioned above, it is rarely possible
for the infrastructure authority to extract directly the required contribution
from each member of each beneficiary group. This is because the cost re-
covery mechanisms (rates, taxes, consumption charges, and so on) available
to the infrastructure authority single out specific groups of people or orga-
nizations that mayor may not be the same as the beneficiary groups of
interest. As a result, the cost recovery mechanisms will differ in their ability
to target the appropriate beneficiary groups.
In the fourth step, I derived a measure of how effective each cost recovery
mechanism is in terms of targeting the beneficiary groups of interest. One
way of defining such a measure is by determining the number of people who
receive some sort of benefit from the infrastructure and who also are targeted
by the cost recovery mechanism, in relation to the total number of people
targeted by the cost recovery mechanism. This measure is denoted as the
targeting ratio t, defined, for each cost recovery mechanism and beneficiary
group, as
t= BIT
Here, B = the number of people in the beneficiary group actually targeted by
the cost recovery mechanism; and T = the total number of people (whether
in the beneficiary group or not) targeted by the cost recovery mechanism.
This applies tothe case where B ::s; T, which might occur, for example, when
considering how well state taxes target the patients in a hospital.
Alternatively, t can be defined as the number of people on whom the cost
recovery mechanism impacts and who also receive a benefit from the infra-
structure, in relation to the total number of people who receive a benefit from
the infrastructure
t= TIB
This applies to the case where B ~ T; for example, where the wider com-
munity, which benefits from the presence of the hospital through improved
general health and the resulting economic and social benefits, is to be targeted
with a user pays funding option.
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J. Urban Plann. Dev. 1998.124:44-53.

 Values of the targeting ratio 1 will thus lie between zero and unity. A small
value of the targeting ratio indicates that the cost recovery mechanism under
consideration is relatively ineffective in targeting a particular beneficiary
group, whereas a value close to unity indicates that the cost recovery mech-
anism is highly effective in targeting the beneficiary group under consider-
ation.
Clearly, a beneficiary group could be affected by more than one cost re-
covery mechanism-in the preceding example, an individual who supports
a hospital through taxes could be a patient in the same hospital, paying di-
rectly for the medical services the hospital provides. This situation comes
about because the beneficiary in question consumes two types of benefits and
will therefore be targeted by two cost recovery mechanisms.
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The complete set of targeting ratios for all groups and all cost recovery
mechanisms can be summarized in an F X N targeting matrix T

[,,,
t 21
t 12
t22
t 13
t23 'tO2NN]
= ~~~
t 32 133 t3N
T
tFI t F2 tn tFN
The first column of this matrix, for example, represents the effectiveness of
cost recovery mechanisms 1, 2, ... , F in targeting the members of the first
beneficiary group.
The first and final step was to calculate the final allocation of costs. This
is a vector f of cost shares!I,J2, ... ,IF' to be met through the F cost recovery
mechanisms available, and is given by

The vector f has F elements; each element specifying the proportion of the
total cost of the infrastructure that is to be recovered from each cost recovery
mechanism. The reason for couching the final solution in terms of the share
of cost to come from each cost recovery mechanism rather than from each
beneficiary group is that the former approach is of more practical relevance
to the infrastructure authority, which ultimately makes its decisions in terms
of the amounts to be collected using the various cost recovery mechanisms
(rates, taxes, user charges, and so on), rather than from particular beneficiary
groups.
In the event that a particular group suffers disbenefits rather than benefits
from the infrastructure project the same steps would be followed, including
defining a targeting ratio for the group in question. The end result would be
an additional term in the vector f, which would have a negative rather than
a positive sign, reflecting the payment of compensation to the group adversely
affected by the infrastructure project. Note that the methodology, concerned
as it is solely with the distribution of costs, is as equally applicable to private
sector projects as it is to public sector projects-the chief difference lies in
the range of cost recovery mechanisms available and the way in which they
are administered.
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J. Urban Plann. Dev. 1998.124:44-53.

 The process can be summarized as follows: the shares to be paid by the
beneficiary groups under each criterion are modified by the weight the infra-
structure authority gives to each criterion, and the result of this is in turn
modified by the effectiveness of each cost recovery mechanism in reaching
each beneficiary group. This gives the final allocation of costs. The data that
are needed in applying this methodology are as follows:

• The size, location, and benefits received by the various beneficiary

groups. These can usually be estimated from records held by government
and other agencies, surveys to evaluate the value of the service to resi-
dents, traffic counts, official statistics, and so on.
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• The relative importance or desirability of various funding criteria. In an

elected democracy the relative importance or weighting of the criteria
will be decided through the political process, which will reflect the values
of the community at large.
• The cost shares associated with each funding criterion. The infrastructure
authority calculates these shares using data gathered from surveys (to
determine the expected level of usage of the facility), financial data (to
estimate rises in property values), demographic data, and so on (Sugden
and Williams 1978).
• The targeting ratios for the cost recovery mechanisms that the infrastruc-
ture authority intends to use. These can be obtained relatively straight-
forwardly from data such as population distributions, catchments of the
facilities, surveys of usage of the facility, and so on.

APPLICATION
The application of this methodology can be illustrated by a case study.
The one I chose was based on the community facilities and services plan for
Freshwater Valley, an expanding community west of Cairns in Queensland,
which is part of Mulgrave Shire (Briggs 1992). At the time of the study,
Mulgrave Shire had a total population of 3,685, which was projected to grow
to 10,690 by the year 2000 as a result of the development at Freshwater
Valley. The population of Queensland, 3,034,700 in 1992 (Australian Bureau
of Statistics 1996a) is projected to be 3,634,000 in the year 2000 (Australian
Bureau of Statistics 1996b). In this study, a range of social infrastructures
was identified as being needed for this community, of which one type of
facility, multipurpose neighborhood centers, is discussed here. These centers
provide children's services, community and youth programs, and services for
ethnic groups and the aged in the form of community service information,
drop-in facilities, meeting rooms, location for activities such as play groups,
and offices for service providers. It is thus a reasonable assumption that the
centers will be used by the community almost regardless of age and sex.
The accepted standard for the provision of neighborhood centers is one
per 6,500 persons; ultimately, therefore, Freshwater Valley would need two
neighborhood centers. The capital costs of the centers (buildings and land)
are $200,000 for the smaller and $350,000 for the larger, for a total cost of
$550,000. This study identifies funding sources for the capital costs as local
(rates collected by the Mulgrave Shire council), state (through grants pro-
vided by the Queensland Department of Family Services and Aboriginal and
Islander Affairs), and from incoming residents (through development contri-
butions). The use of the facilities is to be shared by the existing population
and the incoming population.
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J. Urban Plann. Dev. 1998.124:44-53.

 I considered the analysis of the allocation problem using the methodology
described previously. There are three groups that benefit in some way from
the community centers; the users of the community centers, the Mulgrave
Shire community at large (through the increased attractiveness of their com-
munity due to the presence of the community centers), and the population of
the state (through the contribution of the community centers to the general
health and social welfare of Queensland). The share of the total benefit re-
ceived by each ot these groups is estimated by the council to be 70% for the
users of the facilities, 25% for the residents of the municipality, and 5% for
the state. The populations of the three beneficiary groups are estimated by
council to be 8,018 (estimated from surveys that show that about 75% of the
population of Freshwater Valley will use the facilities), 10,690 (the population
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of Mulgrave Shire in the year 2000), and 3,634,000 (the population of the
state in the year 2000).
The criteria considered by the council, in consultation with the community,
in deciding on a funding policy for the community centers were the three
mentioned previously (allocation of infrastructure costs evenly over all ben-
eficiaries, regardless of the magnitude of the benefit they receive; allocation
according to the size of the benefits received; and allocation on a user pays
criterion-for convenience these criteria are designated A, B, and C in this
paper). The shares of costs payable by each beneficiary group under each of
these three criteria are

0.0022 0.7 1]
S= 0.0029 0.25 0
[
0.9949 0.05 0
where each column specifies the proportions of the costs to be allocated under
each criterion. Thus, the first column (A) allocates the share from each of
the three groups according to the populations in each group, spreading the
costs evenly across all persons in the groups; the second column (B) allocates
costs based on the benefit received by each group; and the third column (C)
allocates the shares to direct users of the facilities. Because only the first
beneficiary group comprises direct users of the facility, the element corre-
sponding to this group will be the only nonzero entry in the column.
The council then assigned weights to the criteria. It regarded criteria A and
B as less important than criterion C, giving (in this order) the vector of
weights:

0.1 ]
w = 0.21
[
0.8
The next step was to assess the effectiveness of each of the cost recovery
mechanisms (municipal rates, development contributions, and state taxes) in
targeting the beneficiary groups. The effectiveness of rates in targeting the
users of the community facilities was given by the total number of users
divided by the total number of people targeted by rates (the total population
of the shire, including the incoming residents; 10,690 people in the year
2000), so that
t21 = 8,018/10,690 = 0.75
As a second example, I considered the effectiveness with which state taxes
target the second beneficiary group (the residents of Mulgrave Shire). This
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J. Urban Plann. Dev. 1998.124:44-53.

 will be given by the ratio of the number of residents who are affected by
taxes and who are residents (10,690), divided by the total number of taxpay-
ers in the state (3,634,000), giving

132 = 10,690/3,634,000 = 0.00294

A third and slightly more complicated case arises in evaluating the effec-
tiveness of development contributions in targeting the direct users of the
infrastructure. Development contributions are levied only on the incoming
population [10,690 - 3,685 = 7,005 people by the year 2000 (Briggs 1992)],
not on the existing population (assuming that no significant development
occurs in already established areas). The effectiveness with which only the
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users of the facilities in the group of incoming residents are targeted will be
given by the ratio of the number of users in this group to the total number
of people in this group or, 5,254n,050. The effectiveness with which all
users of the facilities are targeted by development contributions is obtained
by multiplying this by the ratio of the number of incoming residents (who
are the only residents to pay development contributions) to the total number
of people in the Shire of Mulgrave or, 7,005/10,690. The targeting ratio is
therefore

III =' (5,254/7,005) X (7,005110,690) =' 0.491

In this way we arrive at a targeting matrix

0.4915 0.6553 0.0019]

T =' 0.7500 1.‫סס‬oo 0.0029
[
0.0022 0.0029 1.‫סס‬OO

The solution to the allocation problem is then

0.444]
f = T X S X w ='
[0.106
0.678

The shares expressed as a percentage can be obtained by dividing by the

sum of the elements of this vector. The council will thus fund the community
centers by the following allocation: 36.2% by development contributions,
55.2% out of municipal rates, and 8.7% out of state government grants. This
allocation would, of course, change if the council decided, for example, to
give more weight to the first criterion than the third, or if it introduced an
additional cost recovery mechanism, such as a payment per visit by users of
the community centers. The same analysis can be applied to the other facil-
ities to be provided at Mulgrave Shire and the results added to give the total
charges to be levied.
The calculations above had been based on the population in the year 2000
and on current dollar values. In fact, the growth of the community over time
and the provision of the community centers at some stage in the future will
mean that some allowance should be made for the changing value of money
over time by using the net present values of the dollar amounts as the basis
for the allocation. This does not add anything materially new to the analysis,
and will not be further discussed here. One of the many discussions of the
use of net present values in calculating infrastructure costs can be found in
Chapter 9 of Nicholas et al. (1991) or in Peiser (1988).
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J. Urban Plann. Dev. 1998.124:44-53.

 CONCLUSION
The methodology proposed here, while not claiming to provide a complete
answer to all of the difficulties associated with cost allocation, deals directly
and, it is hoped, rigorously with two major difficulties in allocating infra-
structure costs; allowing for the value judgments of the community and for
the imperfections of real-life funding mechanisms. Equally significantly, it
provides a practical framework for dealing with the cost allocation problem.
The issue of practicality is important: infrastructure authorities need a ser-
viceable methodology capable of being applied directly to real-world infra-
structure funding problems.
The approach to cost allocation discussed in this paper also avoids the ad
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hoc funding policies that can so easily arise from the lack of any effective
allocation methodology. There are problems with such funding policies in
that they often lack fairness, consistency, transparency, and accountability,
and are frequently open to error. As a result, they can be contentious and
vulnerable to legal challenge (see e.g., Bird 1976, Chapters 10 and 11). These
are dangers that the methodology developed here largely avoids.
In summary, the cost allocation methodology proposed here has three main
advantages:

1. It provides a logical and systematic template for cost allocation calcu-

lations that serve to guide the planner through all the steps involved in
developing a cost allocation scheme and, which is readily transferable
from one situation to another.
2. It provides a consistent structure for allocating costs-in other words,
the same basis for the calculations can be applied by different infra-
structure authorities to different situations, giving results which are
comparable-which is at the same time flexible enough to accommo-
date a diversity of aims.
3. It is particularly convenient in that it can be readily adapted for spread-
sheet use.

This method will, it is hoped, find application in the planning and funding
of urban infrastructure projects by providing a practical way of allocating
costs that systematizes the decision making process and resolves conflicting
aims in an equitable manner.
Finally, it should be remembered that, in the methodology proposed here,
no account has been taken of the different incomes, preferences, or other
circumstances of the individual consumers (Pearce and Nash 1981). In this
paper, individuals are differentiated purely by the different levels of benefits
they receive and by the differences in the effectiveness with which they can
be targeted by the cost recovery mechanisms that the infrastructure authority
has at its disposal. For this reason this allocation solution, while it builds in
many of the factors that influence the way costs are allocated, may not be in
economic terms the most efficient solution, even though it may represent the
best solution available in practical terms. The economically most efficient
solution may, however, be very difficult or impossible to arrive at in the real
world (pearce and Nash 1981).

APPENDIX. REFERENCES
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 Australian Bureau of Statistics. (1996b). "Projections of the populations of australia
states and territories, 1995-2051." Catalogue 3222.0. Series A, ADS, Canberra,
Australia.
Bird, R. M. (1976). Charging for public services: a new look at an old idea. Canadian
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Briggs, S. (1992). The application ofdeveloper contributions for social infrastructure.
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Moore, W. B., and Muller, T. (1991). "Impacts of development and infrastructure
financing." J. Urban Ping. and Devel., 117(3),95-107.
Nelson, A. C., Nicholas, J. C., and Juergensmeyer, J. C. (1990). "Critical elements
of development fee programs." J. Urban Ping. and Devel., 116(1), 34-47.
Neutze, M. (1995). "Methods of funding urban infrastructure." Urban Policy and
Res., 13, 20-28.
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Nicholas, J. c., and Nelson, A. C. (1988). "Determining the appropriate development

impact fee using the rational nexus test." J. Am. Ping. Assn., 54, 56-66.
Nicholas, J. C., Nelson, A. C., and Juergensmeyer, J. C. (1991). A practitioner's guide
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Pearce, D. W., and Nash, C. A. (1981). The social appraisal of projects. MacMillan,
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Peiser, R. (1988). "Calculating equity-neutral water and sewer impact fees." J. Am.
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Squire, Lyn., and van der Tak, H. G. (1975). Economic analysis of projects. Johns
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29.

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J. Urban Plann. Dev. 1998.124:44-53.