Organizations both in the public or private sectors have to satisfy their need for funding because they need to be up and running. Institutions can finance operations using internally generated funds or seek to finance from external sources. While there are often limited internal funds, there are a variety of external sources for organizations to obtain financing, especially as debt. Debt funding involves raising finances through borrowing whereby a variety of debt instruments like bonds can be used. The public sector or the government also operates like other institutions whereby it can obtain funding internally or from other external sources (He & Xiong, 2012; Dalton, 2013). This paper analyzes the various sources of public funding and also sheds light on various types of instruments of debt.
Sources of Public Funding
- Revenue from tax – this is the most dominant source of funding for all public sectors around the world. Tax revenue comes in from a variety of channels both as a result of local and international activities. As a result of international activity, funds are generated in customs duty as import and export taxes. The government also collects tax due to consumption of goods and services through taxes such as VAT and sales tax. Other taxes are paid due to ownership of property and also on income and profits for corporations (Dalton, 2013).
- Royalty and sale of fixed assets – governments have plenty of assets such as land, properties, and buildings that can be leased or sold out to provide funds to run various projects. Other important resources such as mining of marketable minerals such as oil yields royalty payments (Dalton, 2013).
- Dividends – it is common for governments to own various trading institutions or engage in industrial undertakings in product and services sector. As such, they get to enjoy a share of dividend payments that are an important capital source of funding for various public projects (Dalton, 2013).
- Fees and fines – the government provides myriad services through its various institutions hence capacity to generate funds. Registrations of all sorts ranging from individual to commercial bring in funds due to charges collected. Administration of judiciary, fines and fee collection also provide important funding to the government. The government also provides licensing especially to vehicles from which it earns a lot of funds (Dalton, 2013).
- Grants and gifts – this is an important funding source whereby international institutions and foreign states provide financial aid to support various humanitarian or economic development projects. Developed countries and institutions such as World Bank provide the bilateral or multilateral aid in form of grants. The notable significance of foreign grants is that they do not governments to pay for them. The public sector can also receive funding in form of donations or gifts from its citizens or foreign society during difficulty times especially war and hunger and other emergency situations (Dalton, 2013).
- Internal and external debt – this allows for governments to borrow as loans from well-established countries. External borrowing is common for developing nations looking to develop through various projects (Stephen, Mohanty & Zampolli, 2010). Also, monies can be borrowed internally especially from locally wealthy individuals.
Types of Debt
- General obligation bonds – these are bonds issued by governments without provision of a particular source of revenue to pay back the bondholders. It is general in a manner that the bond allows the issuer to use any available source of funds to meet the interest and principal amounts due to the bonds.
- Revenue bonds – these bonds are issued by governments with provision or agreement that they will be repaid from a specified source of revenue. The pledge from the issuer is a guarantee that only a particular revenue-generating project will be used to meet the bondholders’ dues.
- Certificates of obligation – these are debt instruments that governments can use to fund public projects minus voter approvals. This follows that most local government provisions require seeking approval for bond debt. However, these debt instruments come in handy to provide funding in situations of emergency or urgency whereby there would not be enough time to undergo processes of seeking approval through voting.
- Contractual obligations – this is debt that arises as a result of a promise to pay for particular charges as articulated in a contract. The responsibility to pay the debt lies to the person who signs the contract which forms the pledge to pay hence a contractual obligation.
- Commercial paper – an unsecured debt instrument issued in the short term to fund short-term obligations and finance current assets. These instruments do not involve collateral hence fit large and established companies with healthy credit ratings.
- Capital leases – a contractual agreement whereby the lessor maintains legal ownership of property but the lessee not only gain operational control of the property as some of the economic risks and returns are shifted to him. The lessor will largely finance the property but other rights go to the lessee. Often, such leases give lessees rights to purchase the property at the end of the agreed period (Dalton, 2013).
- Notes payable – this is a debt instrument that enables a party to obtain funds as a loan with a promise to pay back after an agreed period. It is a form of a written promissory note that a lender can issue to given party but allow interest accruals.
Dalton, H. (2013). Principles of Public Finance. Hoboken: Taylor and Francis.
He, Z., & Xiong, W. (2012). Debt Financing in Asset Markets. Cambridge, Mass.: National Bureau of Economic Research.
Stephen G., Mohanty S.& Zampolli F. (2010). The future of public debt: prospects and implications. Monetary and Economic Department, Bank for International Settlements.