How the nation can approach 2021 in infrastructure funding
By Manuel H. Lazerov
The election is behind us, and a new administration has indicated that infrastructure will be a priority in America’s economic recovery. In fact, it could be one of the most important economic initiatives over the next 20 to 30 years.
A Historical Perspective
To predict where America’s future infrastructure development is headed, a review of past policies and development would be very helpful. After World War II, America initiated a national infrastructure program, with the federal government assuming 90% of all construction costs, and local government picking up the remaining 10%. User fees were supposed to defray operating and maintenance costs, and in some instances, fees were also collected to fund the replacement of worn out equipment.
That was the basic deal. But, what happened? User fees have been suppressed for decades for purposes of political expediency, namely avoiding necessary increases in user fees.
The pressures of keeping up with the growing costs of replacement, expansion for growth and environmental upgrades have escalated beyond the financial capacity of many jurisdictions. Construction costs are only 10% of overall costs of a project, whereas operations and maintenance, and interest paid on debt can be as much as ten times the original construction costs of a project.
Many communities have been unable to keep up or continue to believe that the federal government will replace their plants, as they have in the past. That has resulted in plants’ deteriorating at a more rapid rate, and the failure to upgrade assets to meet more stringent environmental regulations.
The combination of construction costs, operating and maintenance costs and interest on borrowed funds are the totality of life cycle costs. To fund them fully, user fees have to be adjusted accordingly.
Other fiscal pressures such as pension fund contributions for public employees have had their impact on local budgets. Few pension funds of the states are fully funded. In addition, many states have shoved certain financial responsibilities from the state to the local level.
Self-Financing of Infrastructure Projects
Right now, local governments, with excellent credit, can borrow money and develop projects using their balance sheets. This could be affected in the future by the pandemic’s long term economic impact. As of the moment, wealthier jurisdictions are not candidates for public-private partnerships.
The benefits of Private Investment in Public Infrastructure
It is widely assumed that future federal assistance will not be as generous as many jurisdictions are assuming. The position that grants and 1% loans from the federal government will continue to be the norm is way off the mark. This is why private investment must play a larger role if we are to properly upgrade and expand our infrastructure to maintain a solid competitive advantage internationally, and to recover economically at home.
Also, there’s no discounting the advantages afforded by private investment, which can reduce costs, and construction and ownership risks contractually.
Incoming Congress and administration will need to come up with a national infrastructure plan, and establish a ten year budget for funding the program. With that will come a clearer recognition that the money which will be allocated is woefully inadequate to achieve everything that is really vital to a recovery and to stimulate economic growth.
Most nations have found that the creation of a national infrastructure bank is helpful in implementing a national infrastructure plan. It will serve two purposes: facilitating an orderly infrastructure investment program and encouraging the inclusion of private capital into the capital stack of individual projects. The bank will likely stipulate that every loan it makes will include a significant percentage of private capital as a condition of getting a loan. The bank will also use its authority to make direct loans, and to provide loan guarantees to private investors, who it will invite to participate in its lending.
The federal government may do the same, but the probability is not as great. The prediction is predicated upon the stark reality that public borrowing has its limitations, and that, eventually, the federal government will withdraw its current financial support to lower levels. The loan condition, then, really is a virtual mandate, since government loans will continue to be essential.
Many local governments say that they cannot afford market rate financing, and will simply not borrow unless programs stay as they have been. Consequently, mandates are the only means by which to effectively encourage local government to access private capital. That will release a torrent of money just sitting on the sidelines seeking infrastructure investments. The most optimistic prediction is, however, is their realization that infrastructure is a national priority.
Manuel Lazerov is President of Infrastructure Financial, Inc., and can be reached at email@example.com