Alternative private-public sector financing is needed to invest in America’s ailing infrastructure
By Wassim Selman
Increasingly, cities in the U.S. are searching for ways to make their infrastructure attractive to investors.
And financing the deals remains a challenge for many private and public organizations. In December 2015, the U.S. government finally brought new certainty to transportation infrastructure with the Fixing America’s Surface Transportation (FAST) Bill. Sadly though, it is still less than half of the $120 billion to $144 billion per year called for by American Association of State Highway Transport Operators (AASHTO).
Change is afoot. States are increasingly pursuing private financing and putting forward legislation to support this. At the same time, U.S. cities are seeking to use funding methodologies that suit the risk appetite of transportation agencies, investors and contractors, as well as elected officials and the general public. For instance, traditional public-private partnerships are falling out of favor due to the challenges associated with defining long term operation and maintenance costs or uncertainty over toll revenues for highway projects. This opens the door to design-build gap-financing. Design-build allows a contractor to submit a bid for both the design and construction of projects, which can reduce costs, save time and encourage innovation. It’s a type of structure which typically relies on low interest bank financing or cash from institutional funds, which is repaid through annual availability payments from the asset owners. This model is allowing the states to raise local revenue from the new asset by charging for the use of “managed lanes,” for instance.
Another advantage of design-build is it provides an alternative financing source to the bond markets. Not surprisingly, given the attractiveness of the market, projects under development are seeing aggressive competition on cost and an increase in the number of contractors bidding for them. High profile projects such as multi-billion dollar bridges are particularly sought after, with recent tenders attracting multiple financial investors per project.
Transportation authorities are increasingly turning their attention to attracting private investment. For instance, Columbus, Ohio, transport officials will receive up to $140 million for transportation projects mostly by the U.S. DOT and local businesses, but with an additional $10 million coming from Microsoft co-founder Paul Allen’s investment vehicle Vulcan, according to Columbus Business First. Detroit is another example. A new rail line is being built as a way to boost economic development and a more sustainable real estate development, a collaboration between the federal government, the city, the state and philanthropy. Nearby is a bridge being built from Detroit to Ontario to foster continued international trade. It’s also a public-private partnership. Even further investment strategies will be necessary as cities plan ahead for autonomous and connected vehicles and the associated infrastructure and technologies that accompany them.
However, authorities must be mindful that such investments can equate to local involvement and oversight. This is due to the increasingly powerful link between transportation investment and local job creation and because public opinion is key when garnering support for large projects. And according to World Bank, only 33 of our nation’s 50 states currently have legislation in place for private investment in infrastructure. In comparison, Canada requires 25 percent of private financing for major infrastructure projects to proceed.
According to the 2016 Arcadis Global Infrastructure Investment Index, now is the best time for private investment in U.S. cities, driven largely by our cities improving economic positions, low risk environments and strong financial sectors. Yet, there remains a mixed picture regarding acceptance of private investment in U.S. cities. To really bridge the infrastructure investment gap and ensure that economic development moves forward, more incentives are needed from the federal government, laws need to allow for private investors, and more cities need to look at multiple alternative sources of financing.
Wassim Selman is the infrastructure business line president of Arcadis North America. Selman has 30 years of professional experience in transportation system planning, corridor studies and traffic operations, and congestion and mobility management. He can be reached at firstname.lastname@example.org.