A Greening of U.S. Infrastructure?

Considering America’s substantial funding requirements and how green finance could be used to help meet them

By Michael Ferguson

The needs of the U.S. infrastructure are enormous. Water, wastewater, and irrigation systems alone require over $630 billion in investments through 2033 to bring them up to modern standards, according to recent Environmental Protection Agency estimates. Similarly, the U.S. Department of Transportation estimates that all levels of government should be investing up to $109 billion annually by 2020 in order to maintain current physical and performance standards.

Faced with such considerable costs, we expect government agencies to use a variety of financial tools. With the green bond market in the U.S. expanding year-on-year – with much of the 2017 increase driven by municipal issuance – a greater proportion of infrastructure projects may find funding through green finance instruments.

Federal infrastructure commitments

In February 2018, the Trump Administration announced a proposal for three new programs and other changes intended to provide $200 billion in federal funding over 10 years. When combined with state funds, local funds and private capital, this is estimated by the Administration to generate $1.5 trillion of new infrastructure investment. The plan also pledges to dramatically reduce the time it takes to obtain permits, and outlines a host of other features that could revamp state and local governments’ infrastructure investment decisions – while simultaneously opening the door to the private sector.

It is notable, however, that half of the total federal funding pledged in the plan is set aside for the incentive program. This turns the historical funding formula upside down for infrastructure, which has often seen the federal government foot 80 percent of the investment. Now state and local governments will have to come up with at least 80 percent of funding themselves. This is a unique challenge, as not all states or local governments will have the financial flexibility to meaningfully tap into this program… at least not without some creative solutions.

Municipalities driving forward a green agenda

The majority of funding will have to come from municipalities and states – and at a time where U.S. municipalities are issuing more and more green bonds. Self-labelled green U.S. municipal issuance grew by 43 percent in 2017 to $10.4 billion; market estimates suggest that growth could top $15 billion in 2018. For the most part, these instruments fund water projects, green building, and transportation infrastructure. Could this indicate that American infrastructure is going green?

Indeed, even with the federal government’s recent proposition for a further estimated trillion dollars in infrastructure investments (in addition to the 2018 budget), the scale of costs is far greater than federal capacity allows. So, while state and municipal authorities will fund the much-needed overhaul of U.S. infrastructure, we expect they will use a number of financing vehicles in order to do so, including green bonds. In turn, this could see green finance increasingly contribute to funding national and local infrastructure initiatives.

Investor climate concerns

There is also evidence that infrastructure investors are becoming increasingly aware of climate risk. In 2017, the U.S. experienced a particularly volatile Atlantic hurricane season, which brought environmental and climate (E&C) risk to the fore of investor concerns.

This is notable because – whether undertaken by a public sponsor, a private entity, or as part of a public-private partnership (P3) structure – we expect that large infrastructure projects will be funded by debt. Most of these debt financings typically have long tenors, given the nature of these infrastructure projects. As such, we believe climate risk will be high on investors’ agendas – a concern that will only grow if U.S. federal government efforts to adapt to and mitigate climate change move slowly.

While we expect that the issues of infrastructure funding will remain largely unresolved in 2018, U.S. green bond issuance, more broadly, could have another impressive year. In turn, this can complement significant renewable energy and energy efficiency needs that could be funded via green issuance. We expect municipal issuance to be significantly lower in 2018 because of tax law changes that eliminate the ability of governments to issue advance-refunding bond financings. This may spill over to the self-labelled municipal green bond market. In 2017, there were 15 refunding transactions totalling in at $3.8 billion labelled as green – equalling 23 percent of the transactions and 36 percent of the par issued. So, as government bodies attempt to repair and replace infrastructure projects with more efficient and modern equivalents, we may be beginning to see a greening of U.S. infrastructure.

Michael Ferguson is the Director for U.S. Energy Infrastructure, S&P Global Ratings. He may be reached at www.spglobal.com

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