Powering America Forward: A Progressive Vision for Infrastructure Financing

By Kenneth Wun, NLC San Francisco; Stathis Theodoropoulos, NLC New Jersey; & Zach Kenitzer, NLC Kentucky

In 2013, the American Society of Civil Engineers gave America’s infrastructure a grade of ‘D+,’ and warned that over $3.6 trillion of investment is needed before 2020 to move the grade to a ‘B.’ Infrastructure is a wide range of fixed assets that power our economy, and includes everything from roadways to mass transit, waste treatment to water delivery, and seaports to inland waterways. Reinvesting in America’s infrastructure will require economic innovation in the form of innovative infrastructure financing which will include State Infrastructure Banks (SIBs) and the newly created Infrastructure Prizes (Infra-Prize).

State Infrastructure Banks

State Infrastructure Banks (SIBs) are Federal and state-sponsored surface transportation infrastructure funding pools that offer loans and credit for projects. SIBs do not own infrastructure assets, rather they act as lenders and guarantors for project sponsors.

Operation and Benefits of SIBs

Between 1995 and 2012, more than 30 states and Puerto Rico established SIBs. In that time, SIBs financed over $7 billion worth of infrastructure projects. 2015’s SAFETEA-LU expanded eligibility for SIBs to all states, territories, and the District of Columbia for Highway, Transit, and Rail projects. Federal and matching state funds incentivize efficient use of Federal resources while simultaneously giving states flexible transportation dollars.

SIBs allow states to:

• Directly lend to infrastructure projects;
• Sell capital market backed bonds, allowing proceeds to finance additional projects;
• Borrow with lower interest rates;
• Fund infrastructure projects that cross jurisdictional boundaries;
• Establish “revolving” financing, where repayment on one loan leads to the ability to create another.

In the traditional funding model, delays created by political conflicts and bureaucracy delay vital transportation projects. These delays also erode public support and increase costs. SIBs overcome this hurdle by providing credit and loans more predictably and timely. For example; the Kansas Transportation Revolving Fund’s approval process is approximately 60 days from application to loan agreement, as opposed to some projects which take months or years to gain financing approval.

Employing SIBs as a “Grand Bargain” Approach

Surface transportation infrastructure projects will increasingly leverage SIBs, in addition to innovative infrastructure projects utilizing SIBs. The financing model should apply a “Grand Bargain” model that expands the SIBs approach to multimodal aviation and marine transportation. This new approach would also provide increased backing capital in exchange for states that vigorously repay loans and create jobs. At the state level, stakeholders would commit capital to SIBs through one-time legislative appropriations or modest increases in fees associated with transportation. Coupled with rigorous and transparent project selection criteria stakeholders would have increased buy-in. In addition, since one benefit of SIBs is revolving repayment, initial project evaluation ensures that a state has carefully anticipated its ability to repay loans.

The way forward for SIBs

States or metropolitan regions that do not have SIBs should immediately consider establishing a commission to investigate the feasibility of creating their own SIB. The commission, with public hearings, experts, representatives of SIBs from other states will inform citizens on best practices, public sentiment, and action steps.

States or metropolitan regions that do have SIBs should take an immediate step to set up a commission to investigate the feasibility of the “Grand Bargain.” This commission should partner with local chambers of commerce and citizen groups to build coalitions to support the expansion of SIBs.

Public Private Partnerships

Another similar innovative technique to funding infrastructure projects can be found in Public Private Partnerships (P3s). Here, local and state governments work with private entities to collect, create, fund, and manage projects. Critical components of P3s include an efficient timeline for turning around project start and completion. As aforementioned, delays in infrastructure projects are often due to undue bureaucracy and have very serious adverse effects on projects. Another key component of the P3 structure is allowing public opinion to be considered in project approval lending transparency to the approval process.

While we focus on the importance of innovation in infrastructure funding, we should note that it’s been shown that P3s also lead to higher quality goods and services.

One successful entity that does so is the West Coast Infrastructure Exchange.

West Coast Infrastructure Exchange

The West Coast Infrastructure Exchange (WCX) is a 501(c)(3) organization that was created in 2012 by the Governors and Treasurers of the west coast states and the Premier of British Columbia as a step in the solution to our need to provide the financing needed for infrastructure projects. WCX connects private investors with investors in the public sector to discuss and agree on infrastructure projects in California, Oregon, and Washington here at home and also British Columbia in Canada. WCX funds projects that must meet several criteria by using what they called a Performance Based Infrastructure Project Screening Criteria. As we might expect, costs, performance, and complexity are key metrics. These screening criteria assure climate impact, policy hurdles, and project timelines are done timely and efficiently. Moreover, WCX also provides trainings to public entities on the importance, usage, and successes of using such a metric.

WCX funds projects that must meet several criteria by using what they called a Performance Based Infrastructure Project Screening Criteria. As we might expect, costs, performance, and complexity are key metrics; and much to our contentment also consider climate impact and policy hurdles as well as project timeline assuring that projects are done timely and efficiently. WCX account’s for the projects life full life cycle and allows public ownership of infrastructure.

Private funding is largely expected from capital groups and therefore, indirectly, Public Pension Funds.

Workers in the US and Canada want to see more of their pension funds put safely to work at home, helping rebuild our domestic infrastructure, expand
our economy, and rebuild the middle class by creating new and lasting
jobs. SEIU supports the establishment of the West Coast Infrastructure Exchange (WCX), which promises to bridge the gap between investors and domestic infrastructure needs while protecting the interests of working people and our environment.” — Mary Kay Henry, President, SEIU National

Kentucky Passes P3 Bill

More recently, the Commonwealth of Kentucky extended their infrastructure rules to codify the existence and operation of their own P3. In April of this year, the Commonwealth of Kentucky passed billed HB309 which among other things created a process for allowing local governments to solicit proposals that will then be reviewed by the Kentucky Local Government Public-Private Partnership Board and funded in collaboration with private entities. State authorities made clear that public hearings on projects will be held prior to decisions and that decisions on proposals will be efficient, with deadline of 30 days for unsolicited proposals and 90 days for solicited.

The state is hopeful that P3 funding will help tackle projects initially out of reach to local governments. While we often think about transportation, the state can also seek out projects for P3 funding that will maintain their State Parks. For this year, the state has a budget of $18 Million for deferred State Park maintenance. P3s allow the opportunity to have transparent processes for allocating funding and timelines that can support a project’s success.

Infra-Prize

The Infrastructure Prize (Infra-prize) is a public-private incentive competition that will be an avenue for creating new technologies, materials, and concepts to tackle pressing infrastructure problems. While SIBs are designed to finance projects, Infra-Prize is better suited to create incentives to jumpstart and mainstream new technologies, such as better ways to replace deteriorating water pipes, repair rusting bridges, or fill potholes with long lasting materials.
Infra-prize will create competitions to tackle specific infrastructure issues. The competition will uncover innovative ideas by tapping collective knowledge and open competitions, engaging large corporations, universities, small businesses, start-ups, and individuals.

A key piece of the infra-prize is how we using the winning technology. Traditionally technology developed to solve many of problems has had a hard time breaking into the market. A strength of the infra-prize will be how we move the technologies forward. An Infra-prize organization can partner with governments to help accelerate the testing, deployment and commercialization of the technology. By creating the right incentives, partnering with companies to use the the intellectual properties, promoting a powerful environment, and focus, we can solve our challenges sooner rather than later. We will look to not marginally improve the technology of today but to exponentially improve them.

Many of these ideas are inspired by Dr. Peter Diamandis, with X-Prize and his book Bold (2015). We look to use his work as an inspiration to see how we can create incentives that will change and move our communities forward through infrastructure development.

Reasons to Support a Prize

Incentive prizes have proven to be an important catalyst in overcoming challenges through financial award, global recognition, and commercialization assistance. One of the most famous incentive competitions you may not recognize is the Orteig Prize. In 1927 Raymond Orteig offered a $25,000 prize for the first team to cross the Atlantic on a flight between New York and Paris. The winner of this prize was a man named Charles Lindbergh and his airplane named The Spirit of St. Louis. This competition pushed the envelope of flight with later gave birth to the airline industry.

Today incentive prize competitions have been an important pillar in innovation. Two major players in this field that use incentive prizes is the Pentagon’s Defense Advanced Research Projects Agency (DARPA) and the X-Prize. X-Prize began with offering the the Ansari X-PRIZE for Suborbital Spaceflight. Within 8 years a team won the $10 million prize and now that same technology was used to jump start companies in the private space industries. Xprize is currently looking to tackle adult illiteracy, a remote medical diagnosis, and capturing CO2, along with other initiatives. In 2009 the DARPA Network Challenge explored the roles the Internet and social networking play in the real-time communications, wide-area collaborations, and practical actions required to solve broad-scope, time-critical problems.

Using the same ethos, we hope to create the same prizes that will address our pressing infrastructure issues of today and the future. And one of the best parts of these competitions, aside from the ground breaking results it can bring, is that incentive prizes represents a true democratization of problem solving. It doesn’t matter on your race, gender, education, location or any other way we can label one another. Results are objective and the best results always win.

Funding

There are types of sources that are ideal for an incentive competition. But before we dive into this, there is one key factor that makes incentive prizes so attractive to investors, donors and sponsors, and that is the Intellectual Property (IP). The goal in mind for Infra-Prize will be to create materials, processes, tools and other tangible items that can immediately be used for infrastructure purposes. Each winning team will certainly have some sort of intellectual property that has value in a commercial use. And that value will be important.

Depending on how the contest is structured, the intellectual property could be used to as a way to attract sponsors, donors and everyday folk that want to see change. The IP can be held by the winning team and licensed out, it could be held by the sponsor of the prize, or it can even be open source IP that could open to the world. Each Incentive Prize competition will be unique as to how this is handled but provides leverage in getting funding.

Suggested funding approaches include:

• Private Sources — Finding private donors or a group that have an affinity to a certain will be an important source from us. We can certainly tap into a groups that support causes like safe driving, clean water, and other great groups.
• Corporate sponsors — Certain prizes will be very appealing due to a significant monetary incentive of taking the IP down a commercialized road. Many corporations that may not not have the capacity for research or the stomach to take risks, may view this as a worthwhile investment
• Crowdsourcing — We certainly cannot talk about incentive prizes, and so tapping into the talents of millions to discover change, without talking about crowdsourcing. By establishing the right community and creating the proper media, we can tap into the billions of dollars raised through crowd sourcing to support our competitions.

Mechanics — Overview of Plan and Structure

In one way to model the mechanics of Infra-Prize is seen in Peter Diamandis’s book Bold which is the structure that Peter uses for X-Prize.

1. Find the problem you want to solve.
2. Determine the guidelines and metrics.
3. Create the name, purse amount, duration and intellectual property rules.
4. Refine rules and prize.
5. Launch prize and register teams.
6. Operate the challenge.
7. Judging, awarding and publicizing.

As a way to help leaders that are bold enough to take on incentive prizes, X-Prize introduced HeroX, which is an incentive competition platform which helps address the mechanics operations running an incentive prize competition.

Guiding Principles

At the heart of Infra-prize as a tool for providing America’s Infrastructure needs is incubating exponential technologies that will help us leapfrog the current rate of development. When we look to support a new technology, it will be designed two sets of goals.

Primary

• Substantial improvement in the technology, quantified and qualified by the competition panel.
• Decreased overall costs of implementation and lifetime maintenance of project.
• Improved quality and safety.

Secondary

• Creates a positive environmental impact.
• Creating innovative technologies.