Financing and funding the future
Adapted from AECOM’s Future of Infrastructure report, the following article by CEO Mike Burke and Specialist Consultant Clive Lipshitz speaks to the increasing urgency to resolve the financing and funding of future infrastructure. The authors outline approaches that have the potential to help address the infrastructure gap.
With massive infrastructure demands around the world, and against a reality of constrained public-sector budgets, bold leadership is required to prioritize assertive public policy, harness private capital, and bring innovation to infrastructure funding and project delivery. While many of the following observations and recommendations apply globally, much of the focus in this article pertains to the United States.
FOUR APPROACHES TO BRIDGE THE GAP
The need for substantial investment in infrastructure is well documented. Unfortunately, there are no silver bullet solutions and, given the stakes, inaction is not an option. What is required is a combination of approaches aligned behind a strong vision, transparency, innovation, and a conducive regulatory and permitting environment, as well as willing partners — across borders, governments and industries — that can rise above complicating factors, build trust and generate confidence to proceed forward.
In this spirit, we look at four approaches that, taken together, can help reduce the infrastructure financing and funding gap.
1/ PUBLIC-PRIVATE PARTNERSHIPS
Public-private partnerships (P3s) are an effective way of transferring life-cycle costs of infrastructure from public-sector budgets and creating investable assets for the private sector. We expect that the P3 market — which is quite evolved in the United Kingdom, Australia and Canada — will deepen in the United States as concession terms become standardized and as valuation transparency is enhanced from higher transaction volumes.
2/ A REGIONAL APPROACH TO INFRASTRUCTURE
The U.S. has numerous authorities that operate — and have been responsible for developing — significant portions of the nation’s infrastructure. Their advantages? These bodies take a long-term and expansive view of infrastructure needs.
Governments seeking to advance P3s in a programmatic manner might adopt the successful model of infrastructure offices — such as the U.K.’s Infrastructure and Projects Authority and Canada’s Infrastructure Ontario and Partnerships BC — at a regional level. The role of these centers is, among other things, to spur P3 activity through encouraging enabling legislation, prioritizing projects, and interfacing between procurement agencies and private capital sources.
3/ BETTER MODELS FOR FUNDING OF INFRASTRUCTURE
Whether financed by public or private capital, there is much that can be done to enhance funding models for infrastructure assets.
- GENERATE SUSTAINABLE REVENUES THROUGH FAIR-USAGE CHARGES: Many infrastructure assets, particularly in the transportation and water/waste sectors, are subsidized or free to users. This is not uniformly sustainable and so we recommend a reality where, in the words of the American Society of Civil Engineers (ASCE), users “pay … rates and fees that reflect the true cost of using, maintaining and improving … infrastructure.
- CREATIVELY UTILIZE VALUE-CAPTURE TECHNIQUES: Land and property values increase, sometimes dramatically, when they benefit from adjacent infrastructure. Value capture leverages the increase in real estate valuation to fund infrastructure development.
- ENSURE DEDICATED AND ROBUST STATE AND LOCAL SOURCES OF FUNDING: Stressed state and local budgets inevitably lead to maintenance backlogs. Thus, it is of prime importance that local sources of maintenance funding be developed from tax revenues and safeguarded, protecting them from being diverted to other budgetary needs.
- MODERNIZE THE GAS TAX:The U.S. Highway Trust Fund, which finances most federal government spending for highways and mass transit, is funded primarily from gasoline taxes. Because wear and tear on roads is correlated much more closely to mileage driven than to gasoline usage, the fund could be stabilized using a mileage-based revenue source that accounts for both gasoline-powered and electric vehicles.
4/ ENCOURAGING GREENFIELD DEVELOPMENT
Development of new infrastructure requires substantial capital and entails significant risks. We propose several approaches to address these challenges.
- GOVERNMENT-SUBSIDIZED CONSTRUCTION FINANCING: We believe budgets for U.S. governmental programs that subsidize financing for infrastructure development should be expanded. They are an effective way of providing leverage to federal funds, from private capital and state or local public capital, in the development and maintenance of infrastructure.
- ASSET RECYCLING: An effective way to leverage public capital in a resource-constrained environment is to fund new infrastructure via “asset recycling,” whereby proceeds from the lease of existing assets are redeployed in the development of new infrastructure.
- MITIGATE RISKS FOR PRIVATE INVESTORS: Private capital is generally unwilling to invest in greenfield development because of the difficulties in accurately budgeting development costs and timelines, and forecasting future revenues in the absence of operating history. These risks can be mitigated by inclusion of the right partner in the development and operating consortium.
- REFORMING REGULATORY AND PERMITTING PRACTICES: Predictable regulatory guidelines and efficient permitting processes can be helpful in driving private investment into infrastructure. Policies set by one administration or legislature can fall away with the next, creating uncertainty.
As we have argued, there are practical steps that can be taken right now by participants in the infrastructure market, as well as public policy initiatives that we actively support. In future articles, we expect to expand our scope beyond the United States.
For the full article and source material, visit: https://infrastructure.aecom.com/infrastructure-funding