Financing FutureStructure: Paying for the modernization communities need

Aging infrastructure is expensive to maintain - new infrastructure requires fresh investment. What is a community to do?

by John Miri / June 1, 2013

While it should not come as a surprise to anyone that managing and maintaining aging public assets is becoming increasingly expensive, the numbers are truly astounding. The American Society of Civil Engineers (ASCE) projects a major shortfall between needed and actual expenditures. Between now and 2020, the country will need to invest $3.6 trillion on infrastructure, but expenditures are poised to fall more than $1.6 trillion short of that mark.

To ensure that civil infrastructure meets citizen and business needs, many states and localities are looking beyond traditional funding models. Innovative approaches that complement traditional processes can provide new sources of funds for replacing, improving and sustaining public waste, water and energy infrastructures.

Infrastructure Banks Pool Public and Private Funds

Some states and localities are experimenting with public infrastructure banks, which can overcome investment barriers. Such banks provide financing for projects through a combination of existing public funds and private sector capital. For example, the Chicago Infrastructure Trust, created in 2012, is governed by a five-member board that determines how to finance potential infrastructure proposals submitted by government agencies. Some projects will receive funding from the usual sources, such as city money backed by bonds, but those that generate revenue will have access to funds from private investors.In January 2013, the Trust issued its first request for qualifications (RFQ) for the opportunity to finance the retrofitting of city buildings for energy efficiency.

Connecticut’s Clean Energy Finance and Investment Authority (CEFIA), established in 2011 by the state legislature, is touted as a model infrastructure bank. The first of its kind in the nation, Connecticut’s “green bank” is a quasi-public finance authority that was seeded with a $48 million combination of private capital and public funds. CEFIA provides low-cost, low-interest 

loans for renewable energy projects by leveraging private sector investments with existing state and federal funds for clean energy and energy efficiency. Loans are structured to ensure private interest in the form of equity capital and to deliver a solid return on investment (ROI) that covers costs. Returns are capped to prevent risky but-profitable loans from being made with public money.

Some policymakers have proposed the development of a national infrastructure bank to invest in significant national and regional transportation, energy and water infrastructure projects, but the idea hasn’t gained a toehold in Washington. A 2011 bill that proposed the creation of such a bank is languishing because its original sponsors have left the Senate. The Obama Administration recently called for the development of a national infrastructure bank that functions as an independent, wholly owned government entity, but it hasn’t provided specifics yet.

Public-Private Partnerships: Sharing the Risk and Rewards 

Through his Clinton Global Initiative (CGI), President Bill Clinton has been a long-time advocate of private investment in public infrastructure. CGI has encouraged public infrastructure investment by labor organizations, which can finance projects using union pension money. For example, through CGI, the New York City Teachers Retirement System pledged to invest $1 billion in infrastructure projects throughout Hurricane Sandy-affected areas. The funds were part of a larger ($10 billion) commitment made by multiple labor organizations to invest workers’ capital in the construction and repair of public infrastructure. 

Public-private partnerships (P3s) can help government officials that are challenged by stretched-thin budgets and scarce technical expertise. A P3 is a contractual agreement between public agencies and private sector entities that results in the delivery of public infrastructure. In a P3, the private sector partner provides investment capital and much more, including project management and administration, procurement, engineering, construction, operations and maintenance. In doing so, it assumes significant and frequently long-term financial, technical and operational risk, as well as public accountability. In exchange, the private company shares in the rewards of the project through service fees, tolls, availability payments and other options.

Last year, the city of Bayonne, N.J., inked a $150 million, 40-year contract with a private partner for the repair, maintenance and operation of its aging water, sewage and sanitation systems. The city will maintain ownership and control of the systems, and will oversee the contract, purchase water and pay sewage treatment fees. No city employees will lose their jobs. The city’s private partner will collect water and sewerage tariff s from customers. An 8.5 percent rate hike will immediately be imposed on customers. Rates will remain fl at for four years, followed by automatic 4 percent hikes. Some residents have balked, but the city — which had not increased rates in six years — said that without the P3’s resources, a 26 percent rate hike would have been required. The deal will result in $14.5 million in capital improvements, including new water meters and a water usage monitoring system. Besides annual investment in system repair and upkeep, it also provides rate predictability and professional management administration and services. The money will also be used to pay off all of the municipal utilities authority’s debt. Opponents of privatization view PPPs with suspicion. But P3s and privatization are not the same, says Richard Norment, executive director of the National Council for Public-Private Partnerships (NCPPP). 

“With P3s, the public sector maintains a high level of ownership and control over the project and its outcomes, which may not be the case with privatization.”Others say that private investors’ 

relentless focus on profi t puts taxpayers and the government at risk. But proponents of P3s note that the private sector is involved in the design, building, development and fi nancing of traditionally funded projects. And being motivated by profit and loss gives them the incentive to avoid risk and going over budget. 

“P3s don’t apply to all projects. They make the most sense where there’s a clearly defi ned revenue stream that is sufficient to retire the investment and provide an acceptable ROI,” says Norment. “It’s a win-win-win for the government entity, the private company and the general public.”

More Effective Use of the Base Budget

As government leaders strategize how to replace public assets that are past the point of cost-efficient repair, a greener and more cost-efective approach is taking shape. Progressive leaders are weighing the development of smarter, more efficient infrastructure.

In the past, when heavy rains or snowmelt inundated the region, Central New York’s Onondaga Lake was on the receiving end of combined sewer overflows (CSOs) from the nearby city of Syracuse. The U.S. Environmental Protection Agency (EPA) required Onondaga County to reduce CSOs to the lake by 80 percent by 2012. The county originally proposed a traditional solution with an estimated $100 million price tag: the construction of four sewage treatment plants that used old technologies, chemical-based treatments and considerable energy. 

A new county executive halted the project and collaborated with a private firm, the EPA, and the state and federal courts to come up with a green alternative that saves money by capturing significant amounts of stormwater, preventing it from receiving costly and unnecessary treatment alongside municipal sewage. Projects include a 66,000 square foot green roof on the Syracuse Convention Center; porous pavements in public parking lots, parks and basketball courts; the conversion of the local professional hockey team’s ice rink to recycled rainwater; and a grant program that helps local business owners align their buildings and properties with county goals. 

The county now has a more balanced, cost-effective approach to wastewater treatment. It still relies on a traditional sewage treatment process and invests in the repair and construction of “gray infrastructure,” but its “green infrastructure” reduces stormwater runoff . As for Onondaga Lake, “The water looks blue, it smells good and people want to be near it,” says Joanne Mahoney, the county executive who spearheaded the project.

Reclaiming Public Investment for Public Infrastructure

Innovative strategies for increasing private investment in civic infrastructure are important, but so is continued public investment. Over the last half century, federal spending has shifted from investing in public works and infrastructure to other priorities, such as direct aid to individuals and military spending. A revival of public infrastructure investment could happen in the near future due to policy and technology changes in programs such as healthcare and human services. Programs like Medicaid and unemployment benefits, and services like public safety are undergoing policy reforms. They’re also being impacted by the use of technologies that improve workflows, employee productivity and service delivery. These changes and reforms bring with them the promise of cost savings that can be reallocated back to the public good.

Without the ongoing investment required to maintain an efficient civil infrastructure, the U.S. can’t continue to increase quality of life for its citizens or be a global business innovation leader. 

Forward-thinking government leaders are stepping up to the plate to keep their states, counties and cities competitive. When traditional funding such as bonds, tax-supported federal and state grants, tax credits and subsidies are no longer viable, they’re bringing innovative financing options to the table. In doing so, they can create a more balanced and cost-effective approach for improving and sustaining public waste, water and energy systems.

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