In this section, Federico Villalobos interviews colleagues worldwide in the finance and infrastructure industry. The objective of these conversations is to provide readers with first hand experience from experts as well as an update on international best practices.
This week, we talked to Neil Smith CEO & Founder at Infraccess. As an industry expert, Neil provides an insight of the United States infrastructure challenge and analyses the key difference between the concepts of financing and funding.
* How do you explain that the world´s largest economy is facing the problem of a crumbling infrastructure?
America is facing an infrastructure problem - it needs to invest heavily to repair and replace its crumbling existing infrastructure, but requires even more to catch up and exceed its competitors in providing next generation infrastructure for smart cities, resiliency and sustainable development.
Capital for fixing this problem is available and this is an attractive asset class especially for institutional investors like pension funds and insurance companies. Yet institutional investors are sitting on the sidelines with hundreds of billions of dollars in dry powder - uninvested or under allocated. I think there are a number of reasons, a few of which are:
- Public investment in infrastructure has continued to decline as the public sector face fiscal deficit and indebtedness constraints, especially at the state and local levels.
- The American federal system has complicated a coordinated approach to attracting more private investment to infrastructure investments - even now only 33 U.S. States, District of Columbia, and one U.S. territory have enacted statutes that enable the use of various Public Private Partnerships (P3) approaches for the development of transportation infrastructure.
- Institutional investors need better access to relevant data and analytics to more easily discover these investment opportunities - the bankable projects - and to make quicker and better informed investment and risk management decisions. Currently these investor face significantly high cost, time and resource hurdles to accessing the data points to make their investments.
*President Trump is talking about a US$1 trillion plan. Is that enough?
The planned $1tn is not nearly enough. This is projected to just repair and replace existing infrastructure and create facilities to support the current low levels of economic growth. We urgently need to build new, next generation of infrastructure to catch up to other economies and deliver smart cities.
*The debate between Republicans and Democrats has been focused on private versus public financing. It seems people is not considering the difference between funding and financing. What are your thoughts on this?
This is another one of my frustrations. Funding and financing are always being used interchangeably in this debate. This leads to confusion and inferior policy decisions.
Essentially funding is who pays in the end. Financing is who provides the capital in order to get the facility built in the first place, for a return on the investment and with infrastructure with strong confidence that the capital will eventually be repaid. Both funding and financing play a critical role in getting infrastructure projects completed.
Who finances a project means who invests the capital to build operate and maintain the facility. This could be the public sector or private sector, who raise debt and equity to finance the public asset. Traditional sources of capital for infrastructure are currently constrained. The public sector face budgetary and indebtedness constraints, whilst commercial bank loan financing is being affected by capital adequacy regulations. There is a financing gap and its significant and growing by the day.
Private investors can help fill this gap. In Public Private Partnership structures the private sector can help finance the investment in schools, hospitals, roads, trains, accommodation and housing. As I mentioned earlier Institutional investors are sitting on the sidelines and not participating as much as needed. These pension funds, insurance companies, funds needs access to better data and analytics to power up their investments infrastructure projects. But the availability of finance or capital doesn’t eliminate the need to have funds.
Who funds a project is a question of who ultimately pays for it over the long term; is it the user, the taxpayer or the customer? Repayment can come from federal or state tax revenues, but it can also come from future user fees, dedicated sales taxes, new tax revenues that result from the project (e.g., increased economic activity from development), or other sources (such as revenues from concessions at rest stops or airport slot fees).
My hope is that the debate gets more informed and data driven, especially by a broader understanding of this difference, but also by access to better data and analytics. A clearer understanding of which infrastructure projects are successful and why - what factors affected that success and failure; which financing and funding structures worked and which didn’t. Even something as simple as a pipeline of infrastructure investment opportunities with details on proposed financing and funding mechanisms that allows some comparative analysis would help a lot.
*Do you think we will see an increase in gas taxes to strengthen the Federal Highway Trust?
Increasing the gas tax for the FHT continues to be politically difficult. In a period where we have enjoyed low gas prices an extra few pennies would have helped fund much needed road and bridge infrastructure without significant political pain. It still could be possible but I fear that political gridlock will prevail. But more importantly I feel that the inevitable trends towards people traveling less in cars, more fuel efficient vehicles and autonomous electric vehicles and drone technology will require new thinking and other approaches to fund the necessary transportation infrastructure.
Do you think PPPs will be key to close the US infrastructure gap? Whats are your thoughts regarding the experience of Virginia on PPPs?
Public-private partnerships (PPP or P3’s) offer an opportunity not just to tap new financing sources and transfer certain project delivery risks but to bring "whole of life” efficiencies to the delivery of American infrastructure. The use of PPPs in America has been relatively small and new compared to Europe, Australia and Canada. The preference for using public delivery of infrastructure comes from State and local government access to inexpensive long-term debt via tax-exempt municipal bonds. In recent years some federal initiatives like the Transportation Infrastructure Finance and Innovation Act (TIFIA) and PABs financing tools have helped lower the borrowing costs for PPPs.
Virginia´s PPP Experience
The Commonwealth of Virginia was an early adopter of the PPP framework and has been probably the most successful State with these partnerships. I feel that Virginia benefits from:
- A well crafted, very clear and flexible legislative foundation;
- It established a strong governance structure with a central authority with highly skilled experienced staff and qualified Advisory Committee (the Virginia Office of Public Private Partnerships);
- Educates stakeholders and cultivates political support with easily understood and transparent approvals process and clear input and comment opportunities
- Provides a pipeline of project opportunities.
However PPPs are not just about project financing and are only one (albeit important) facet in building infrastructure. We need to get more data on where and why PPP’s have been successful globally, We need the data of what are the features of PPPs that work and which that need to be improved. And we need a comprehensive all-American pipeline of project investment opportunities - investors have had to go to many individual agency web sites or rely on the news or their networks to discover what PPP opportunities are coming down the pipe. That way we can create a full menu of options for private involvement in infrastructure and attract more private investment into this asset class.