Question

Describe in 2-3 pages the difference between pay-as-you-go versus pay-as-you-use methods to fund capital acquisitions, and which is the better method?

Answer 1

In the pay as you go scheme, the capital projects are financed from the current revenues of the government or the public entity, which is promoting the project. Due to this kind of financing, the additional cost of financing and interest payment does not fall on the government and it can spend as per its own internally generated funds. This obviously means that the current tax payers who contribute to the revenue of the government entity are in a way funding those projects whose benefits won’t be enjoyed by them. This creates a problem of inter-generational equity as people in the present are subsidizing the creation of facilities which would be used by persons in the future.

On the other hand, pay as you use is a useful concept wherein the cost of the project is spread over the life time of the project and the facility is financed by loan and the pay back of the loan is to happen through equated instalment throughout the life of the project. As the project is used, the revenue is generated from the usage and this is used to pay back the loan. Thus as the usage goes up, the revenue also goes up and the loan paid back also increases. As a result, intergenerational equity is maintained in pay-as-you use method which is also more fair as the users using the facility more also contributes to the payback in a greater manner.