How Private Capital Can Solve America’s Infrastructure Investment Problem
Needed: an extra $1.4 trillion to fund needed maintenance, repairs and reconstruction of aging U.S. infrastructure.
That figure comes from a recent study by the American Society of Civil Engineers (ACSE). The trade association estimates the United States needs over $3.3 trillion in investment to address weaknesses in the nation’s surface transportation system, waterways, airports and utility infrastructure.
Currently, only about $1.9 trillion in funding is expected to be available. As roads, highways, bridges, airports, water and sewer systems, and other assets deteriorate and the growing population places increasing stress on systems, investment in critical infrastructure is essential. So where will the needed funding be found?
“There’s an extreme infrastructure deficit in our country. In order to bring our infrastructure into the 21st century, we need to invest more,” explains Michael Decker, managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association. “The capital for investment exists; our challenge is to identify reliable funding sources to support debt service, return on capital and maintenance costs associated with projects.”
Part of the challenge is that such projects are costly, and traditional sources of public funding are stretched tight.
Municipal bonds have long been the nation’s most important form of long-term financing used by cities, states and local government entities to fund these needed projects, as we’ve noted previously. That tax-exempt financing structure allows communities to pay down the costs over a longer term, without imposing additional burdens that can weigh down the economy.
Another financing approach that’s gained ground in recent years is the Public Private Partnership (P3). In a P3, a state or local government entity partners with the private sector to develop a shared solution to meet infrastructure needs.
The typical P3 may be formed as a contract between a government and a private entity or investors to provide the financing (often in the form of long-term debt coupled with equity investments from private investors). In many cases, the private entity will also take responsibility for developing, managing or maintaining the project, in exchange for a share of future revenues the project may generate (for example, tolls or user fees). The government may retain ownership of the project. Supporters of P3 point to the many private sector efficiencies as one of the primary benefits of initiating a P3 financing structure.
Not all P3s are alike — in fact most are customized to meet the specific needs of particular projects and localities. However, a well-crafted P3 in which all parties clearly understand their roles can combine the best aspects of private sector and public sector approaches to addressing community needs.
Moreover, not all U.S. states have enabled P3 arrangements through legislation, though that’s changing as more state and local governments are grasping how a strategic influx of private capital can help to reduce risk and make expensive projects more affordable.
Let’s take a closer look at three examples of how those P3s have worked to solve problems, build infrastructure, create jobs and contribute to economic growth in communities across the U.S.
New York Tappan Zee Bridge
When the 3.1-mile Tappan Zee Bridge, which crosses the Hudson River about 20 miles north of New York City, opened to traffic, it was expected to have a 50-year useful life. But that was in 1955, which means the bridge is now more than a decade past its estimated useful life.
At $4 billion, this is one of the largest infrastructure projects in the United States. By combining federal loan dollars through the Transportation Infrastructure Financing Investment Act (TIFIA), municipal bond financing and state funding, the cost of the overall project was reduced substantially. Citi was the lead manager on the very innovative and complex financing.
Construction on the New NY Bridge to replace the Tappan Zee began in 2013, with most of the substructure work now complete. The results will be a major infrastructure construction project that will create jobs, open up new transportation options, improve traffic flows, and increase public safety.
University of Toledo Student Housing
The University of Toledo (UT) was in need of upgraded student housing. But most higher education institutions find that capital improvements to dormitories and residences are more challenging to fund than new educational facilities.
By forging a P3 with a private student housing developer to construct a new residential community, and with underwriting provided by RBC Capital Markets, UT was able to get what it needed. RBC structured a $37.7 million fixed-rate bond issue to finance a 153-unit, 492 residential facility that opened in 2015.
Over 100 educational institutions have financed over 64,000 new beds utilizing P3 structures since 2010, and such arrangements are likely to continue to grow in popularity on college campuses, RBC’s Chris Hamel and Michael Baird explain in a commentary for Bond Buyer, since they can be implemented more quickly and cost-effectively than traditional state funding approaches. And the fact student housing typically has a dedicated revenue stream — i.e., students pay to live in dorms — can help to lower the cost of financing and interest investors, Hamel and Baird note.
Port of Miami Tunnel Project
In August 2014, the Port of Miami Tunnel, a pair of 4,200-foot tunnels, one in each direction, underneath the port, opened to great fanfare. The tunnel supplements the port bridge that had previously been the only crossing into downtown Miami, improving traffic flows around the port while boosting job creation and economic output at the port.
The port tunnel project began as a P3 in 2009, as a partnership between state, city and county governments and a private entity, MAT Concessionaire LLC, which designed, financed and built the tunnels and holds a 31-year concession on tunnel operations. Barclays served as financial advisor for the financing of the project, which included a $341.5 million debt issuance, a $341 million federal TIFIA loan, an $80.3 million equity contribution and $309.8 million in state and federal funds.
In nearly two years of operation, the Port of Miami Tunnel has helped to reduce downtown congestion and improve traffic flows around the port — critical factors for a bustling commercial center.
Private capital was critical to each of these projects, and their success means that other states and municipalities are likely to open their doors to P3s to meet growing infrastructure needs. By helping to tap into the power of capital markets, financial institutions are helping to make these projects possible — and that’s a win for the government, taxpayers, consumers and investors.
