Investing in infrastructureLeading practices in planning,funding, and financing
Investing in infrastructure Leading practices in planning, funding, and financing02
Investing in infrastructure Leading practices in planning, funding, and financingExecutive summaryInfrastructure is clearly in the spotlight in theUnited States today. From the campaign trailto town hall meetings, concerns about thenation’s aging infrastructure and the lack ofinvestment in new and existing assets arebeing raised.Infrastructure sustains American commerceand trade, bolsters the country’s economy,and makes us more competitive globally andmore secure domestically. But infrastructureassets are costly long-term investments.Many state and local governments that areresponsible for delivering infrastructureassets are facing tight budgets and findingit a challenge to deliver all the infrastructurethey would like to. Bridging this gap is acomplex interdisciplinary challenge thatrequires creativity and innovation in theplanning, funding, financing, construction,and operations of infrastructure assets.Fortunately, the tools required to addressthe gap are evolving and increasinglyavailable to the US public sector. Publicsponsors today have a choice to pursuetraditional public sector procurementor innovative procurement approaches,utilizing the private sector’s capital andefficiencies. Financing is available in multiplemarkets, including municipal bonds, projectfinance loans, dedicated federal creditprograms, and private equity investments.These options help public sponsors alignthe development of capital projects to thetiming and requirements of their budgetsand the needs of their constituents.Furthermore, public sector decisionmakers are increasingly adopting leadingpractices that enable infrastructureplanning and execution flexibility. Improvedcommunication with multiple stakeholders(including voters) on the life-cycle costs andbenefits of specific programs and projectscan lead to the approval of new projects andeven new funding streams.Modern tools can assist in more robustand goal-oriented investment analysis andprioritization/optimization processes thatincrease confidence that the “right” projectsare being built at the right time. Digitalinnovations in capital project managementand oversight, as well as grantsmanagement can increase the efficiencyand speed of project delivery. And activephysical infrastructure asset managementcan improve life-cycle costs and planning ofan infrastructure portfolio.These developments can increase theattractiveness of the US infrastructuremarket, which has already caught the eyes ofan increasing number of global institutionalcapital investors seeking the stable, longterm cash flows of infrastructure assets.Private infrastructure investors are currentlysitting on billions of dollars earmarked forsound infrastructure projects with riskprofiles acceptable to them. Public sponsorswho are able to make the case for theirprojects will be well-positioned to do morewith less by bringing this private capital andprivate sector innovation and efficiencyto play.The time is ripe for the public sectorto improve and integrate its approachon planning, procuring, and deliveringinfrastructure in the United States. Thepublic sponsors who seize the currentopportunity and fully utilize the availabletools for infrastructure development will bethe ones who rapidly develop commerceand trade in their regions. This will ultimatelyenable their economies to competenationally and internationally, makingthem more attractive for businesses andindividuals alike.03
Investing in infrastructure Leading practices in planning, funding, and financingThe case for change: Understandingthe current state of infrastructure inthe United StatesIn developed economies like the UnitedStates, public infrastructure is typically oneof the few forms of government spendingthat gets support across the politicallandscape. Roads, water treatment systems,and power lines all contribute to a smoothlyfunctioning economy. They can alsostimulate economic growth, increase safety,and reduce energy demand.But the opposite holds true as well. Poorroad conditions can increase driving time,waste man-hours as people idle in traffic,and have a major impact on transportationand shipping costs. And bad water andunreliable energy can reduce public healthand productivity.1High spending and acrumbling infrastructureEvery year, the US spends over 400 billionon public infrastructure.2 This figure appearshigh, but annual spending routinely fallsshort of major maintenance requirementsand results in a deterioration of thecountry’s infrastructure assets.In 2017, the American Society of CivilEngineers gave the US infrastructure agrade of D and estimated that thecountry needs an additional 2.1trillion in investments between 2016and 20253 to meet its needs andreduce negative impacts onthe economy.In its 2017 Infrastructure Report Card, theAmerican Society of Civil Engineers (ASCE)estimated that inadequate infrastructurespending could cost the nation almost 4 trillion in GDP, resulting in a loss of 2.5million jobs through 2025. While measuringthe gross infrastructure investment needsin the US is a challenge, it’s clear that chronicunder-investment has created inefficiencies04in large segments of the economy.4According to the ASCE, the pressing needsfor major infrastructure sectors are5:TransitAlthough demand fortransit solutions isincreasing nationwide,US public transit systemsface a 90 billionrehabilitation backlogcreated by a lack of adequate fundingand maintenance. The push to developand upgrade public transit systems hasbeen strong but uneven, and millions ofAmericans still don’t have proper access topublic transit solutions.WaterA large portion ofthe country’s waterinfrastructure isreaching the end of itsuseful life. Accordingto the American Water Works Association,maintaining and expanding the service ofexisting assets would require 1 trillion.AirportsCongestion at airportsis a growing concern,and 80 percent of majorUS airports may soonexperience Thanksgivinglevel congestion at leastone day a week. The federal cap on airportcharges, however, reduces the ability ofairport authorities to address the growingcongestion, resulting in a 42 billion fundinggap over 2016-2025.Roads/highwaysMore than 40 percentof US urban interstatesare congested. In 2014,delays imposed approximately 160 billionin costs, primarily due to fuel costs and lostman-hours. In addition, years of deferredmaintenance have resulted in massivepavement degradation, with 20 percent ofhighway pavements now deemed inpoor condition.ElectricityMost US electrictransmission anddistribution lines arereaching the end oftheir useful lives and arecurrently operating atmaximum capacity. In 2015, there were3,581 outages averaging 49 minutes each,and the age of these assets is raisingconcerns about their reliability and costof service. It’s unclear how the grid willbe able to accommodate future growthin its present condition and adapt tothe increasing decentralization of powergeneration, including diversified renewablegeneration capacity.Waterways and portsUS ports are an essentialenabler of the economy asgateways in and out of thecountry. But they’re struggling in two areas:accommodating increasing vessel sizesin a post-Panamax world, and efficientlyconnecting cargoes with land-based logisticnetworks. Port authorities and their privatesector partners are planning to spend 155 billion between 2016 and 2020 onexpansion, modernization, and repair ofport assets.The need for an infrastructure push in theUS is well-documented and supported bypoliticians on both sides of the aisle. Fewissues benefit from such a public consensus,yet infrastructure still lags behind.
Investing in infrastructure Leading practices in planning, funding, and financingThe elephant in the room: fundingFunding versus financingThe core challenge to infrastructuredevelopment in the US has been—andcontinues to be—the availability andsuitability of funding mechanisms.Funding: The revenue orpublic spending that pays forthe development and ongoingmaintenance of an asset or service.It’s the money that doesn’t have to be“paid back.”“We don’t need to finda solution—we need tofund one.”Financing: The structure and relatedinstruments used to leverage orsecuritize future funding sources. It’sthe money that’s borrowed to buildthe project, and it’s paid back fromthe funding sources.—Joe Boardman, Amtrak president andchief executive6The debate on infrastructure procurementgenerally focuses on developing innovativeways to finance projects. But the morepressing concern is often the need toidentify appropriate funding sources thatwill pay for their creation and maintenanceover their useful life. The difference betweenthe two is subtle but important. Frequently,these two terms are used interchangeably,further muddling the discussion. Sources:FinancingTraditionalInfrastructure projects rely on a dedicatedsource of revenues (funding) to pay fortheir upfront and ongoing costs. Fundingsources can be leveraged and securitizedto cover development and constructioncosts. But projects also need revenues topay for operations and maintenance andto repay the cost of financing instrumentsused to deliver the project. This need isparticularly pronounced for innovativeprocurement and financing solutions likepublic-private partnerships (P3s), wheredeferred and substandard maintenancearen’t contractually permissible.Funding sources are often user fees (usagebased or access charge) or dedicatedtaxes (e.g., sales tax). In the case of taxes,government entities must educate theirconstituents on how the proposed waysto address critical infrastructure gaps willdemand additional tax revenues.Keeping user fees and taxes artificially lowand diverting funding away from regularlyscheduled operations and maintenanceto politically visible "greenfield" projectsare some of the contributing factors to thecurrent situation of deferred maintenanceand the upkeep of declining infrastructure.As all levels of US government activelycontribute to the development of domesticinfrastructure, ensuring that fundingstreams are both adequate and resilientfor the proposed asset development andongoing operations is pivotal to address themassive spending gap. Revenue bonds Federal loans Infrastructure banksInnovative Project finance loans Taxable bondsLeveraged with PABs Mezzanine, sub-debt Investor equityFunding Tolls/fees/rents State and local resources Other operating revenues Federal funds New taxes (sales, payroll, etc.) Uses:Construction costsO&M costs05
Investing in infrastructure Leading practices in planning, funding, and financingThe Highway Trust Fund: An example of decreasing fundingThe Highway Trust Fund was established in 1956 to fund the costs associated with the US Interstate Highway System. The fundcollects and disburses money for federal highway and transit projects across the country. Its impact is crucial for the ongoingdevelopment of US transportation infrastructure, as the federal government accounts for approximately 25 percent of annualexpenditures in highways and transit.7Federal Highway Trust Fund faces growing shortfallsActual and projected revenue outlays, 2000-202560Billions of 516RevenueActual outlaysActual end-of-year balanceProjected revenueProjected outlaysProjected end-of-year balance171819202122232425Transfers from general fundSource: The Pew Charitable Trusts, Funding Challenges in Highway and Transit, and-transit-a-federal-state-local-analysisIn spite of its importance to US transportation projects, spending has outpaced revenues and is expected to continue to do so ifcurrent taxation levels aren’t increased. The federal tax on gasoline has been set at 18.4 cents per gallon since 1993, requiring theUS Congress to regularly supplement from the general fund to maintain a positive balance.806
Investing in infrastructure Leading practices in planning, funding, and financingThe opportunity: Addressing USinfrastructure needsIncreased availability of private capitalThe amount of private equity allocatedfor infrastructure but not yet deployed isat unprecedentedly high levels. In 2015, areported 108 billion of dry powder sat ininfrastructure-focused private equity funds.In 2016, that figure grew to 137 billion.9Estimates indicate that private equity groupsintend to play a significant role in NorthAmerican infrastructure investment, withfirms like Blackstone aiming to target asmuch as 40 billion in infrastructure deals.10The record level of existing, nondeployed investment capital aimed atUS infrastructure projects creates aunique opportunity for sponsors of publicinfrastructure. Following the money, it’sclear that there’s real appetite in the marketfor taking on risk, but only in exchangefor long-term, predictable returns. Recentcompetition for infrastructure assets haspushed up prices, and 51 percent of fundmanagers feel that attractive investmentopportunities were easier to find in 2015than in 2016. Global deal activity declinedfrom 914 transactions in 2014 to 661 in2015; from 444 billion to 349 billion,respectively.11 As the new administrationworks with state and local project sponsorswho seek to make investment-gradeprojects available and bankable, those withdormant capital will seize the opportunity.12Putting private and public funds to useHistorically, infrastructure in the US hasbeen financed by state and local authoritiesthrough municipal bond issuances,with support from federal governmentgrants or low interest loans. However, thefinancial crisis, ballooning pension andhealth care liabilities, and other legacyentitlements have left many state and localauthorities with tight fiscal budgets. Whilethe underinvestment in infrastructureisn’t a recent trend, the funding crisis hascontributed to stagnant or decreasing publicspending during the recovery years.13One potential path to increase publicinvestment in US infrastructure and deliverprojects better, cheaper, and faster is tocombine private investments with innovativepublic financing strategies. The US markethas been opening up to these strategies, butthe growth rate has been uneven, largelydue to the local political climate and thelimited availability of creditworthy projects.Infrastructure financingA public and private partnership (P3)Infrastructure-focused public-privatepartnerships have a decades-long trackrecord of successful application in WesternEurope, Canada, and Australia. But theiradoption in the US has been slow. This is,in part, due to the efficiency and stability ofprivate capital in municipal bond markets,the fact that a number of typical P3sectors—like health care, rail, and energy—have long been privatized
Investing in infrastructure _/HDGLQJSUDFWLFHVLQSODQQLQJ IXQGLQJ DQG4QDQFLQJ The Highway Trust Fund: An example of decreasing funding The Highway Trust Fund was established in 1956 to fund the costs associated with the US Interstate Highway System. The fund collects and disburses money for federal highway and transit projects across the country.