Breaking the Deadlock on Financing Infrastructure

Building infrastructure and public trust

Most of the conversations about building infrastructure are about the methods for financing specific projects so that they are bankable. And there is no end to the creative means of doing so.

This also means that the revenues must be adequate to pay for loans and the cost of capital. That has to do with the sources of funding. Funding is comprised of debt, taxes and user fees. The federal government’s policy regarding infrastructure is as follows: in lieu of providing their own financing, state and local government should sell existing infrastructure to others who would upgrade and manage them, sell additional bonds, or raise taxes and user fees in order to have money to develop new infrastructure.

Funding, or how to repay investment in infrastructure, is at the other end of the equation and is being left out of the conversation for the most part. In its place, the ideas put forward have mostly to do with how investors are insulated from loss. That model relies on, essentially, low interest subordinated debt and loan guarantees.

Why? The reason is because the sources of funding may be too uncertain and conversations about funding are highly contentious. So, if investors are going to get anything accomplished, they feel that they must rely on that model. On a very basic level, people realize the need for and want better infrastructure, but how to pay for it is where the difficulties arise. Whether it’s fees, taxes or debt, there is controversy and divisiveness.

Many people feel that it is simply a function of government to provide infrastructure for free. They feel as if they are already paying for it. Others simply don’t want to pay, period, regardless of the logic that would support doing so. Many others would simply shift the burden to future generations to keep taxes and user fees at levels beneath what is necessary to pay for the life cycle costs of building and maintaining projects on an economically sustainable basis.

But that is only part of the problem. A couple of years ago, there were massive complaints in Canada after an auditor’s report revealed how poorly public-private partnerships delivered on construction and maintenance costs and the quality of service. This week, there were many of the same complaints about the World Bank. Construction cost overruns and maintenance problems have aroused suspicion of and resistance to public-private partnerships. Increases in user fees, attributable to either lower usage of infrastructure or runaway costs, have also been a factor. So, projects which should be getting done are not, and the elephant that is in the room — which is funding — is not even being acknowledged.

In order to generate greater support for building more infrastructure, either by the public sector or by private investors, the public needs a higher level of confidence on outcomes, which may include both monetary and non-monetary goals. This means addressing the issues of overruns, poor maintenance and quality of services. The public needs to be more actively engaged with projects that have value to them. And, still, communities differ greatly on what is actually of value to them. Those jurisdictions whose citizens are unable to be convinced of the value of particular projects, including those concerned with public safety, simply won’t agree to any funding source. Other communities will evaluate projects on their merits and will vote accordingly.

There also needs to be recognition that the reputations of public officials are on the line in approving projects, and that including a new means of delivery by them means change, which implies uncertainty and risk. To mitigate risk, there are active measures which both the government and private investors can take. On the construction phase of the work, using Guaranteed Maximum Price contracting or Construction Manager at Risk agreements provide secure assurances, as long as public officials do not change the scope of the work after the contract is signed.

The Guaranteed Maximum Price contract involves an intensive planning and inspection process whereby the contractor’s fee and a final price are locked in during the preliminary design stage. Contractors with the appropriate software can predict the final price within two to three percent at that time. The responsibility for design and any flaws in the design are also shifted to the contractor, as are overruns.

Operations and maintenance costs for the life of a project can also be guaranteed. In many instances, it makes sense to include O&M as part of a project because it affects both the design and materials and is an important component of life cycle costs. In actuality, O&M costs range from five to 10 times the initial costs of construction.

It is these kinds of assurances that can help to overcome the political and public barriers to developing our nation’s infrastructure. It’s a matter of increasing the level of confidence of both public officials and the public by using agreements which are effective in delivering what has been promised.

Manuel Lazerov is President of Infrastructure Financial, Inc., and ran be reached at lazerov@infrastructurefinancial.org

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