Innovative Financing & The Myth of the Shovel-Ready Project

By Elle Hempen and Shalini Vajjhala

Elle Hempen is Founder & CEO of The Atlas Marketplace, an online platform for smart and resilient infrastructure.

Shalini Vajjhala is Founder & CEO of re:focus partners, a design firm dedicated to developing integrated resilient infrastructure solutions and innovative public-private partnerships, including the RE.invest Initiative and the RE.bound Program.

Apr 11, 2017 | Infrastructure | 5 comments

With every new Administration in Washington there are always sweeping promises about improving the nation’s infrastructure. Since the last recession, these promises have become inextricably linked with talk about mobilizing private finance.

In 2009, after the immediate impacts of the recession abated, it was clear that cities, dependent on tax income, were going to be cash strapped for years to come. Which means while our infrastructure was getting worse, the money to fix it or upgrade it was getting harder and harder to find. This jumpstarted a national conversation—led by pension funds, environmental and social responsibility divisions at big banks, and impact investors—about how private capital could fill the public financing gap through instruments like P3s, Green Bonds, Social Impact Bonds. While there have been a handful of one-off examples and exciting new models, nearly a decade of talk about financing has not translated into substantially larger or speedier private investments in infrastructure.

Why? Because the mantra “if you build it, they will come” unfortunately doesn’t translate to infrastructure. More often, if you built it right, no one will notice.

The highest value infrastructure investments for cities today are those that help clear the massive backlog of deferred maintenance projects, but the greatest value for investors are new greenfield projects that lock-in long-term revenue streams. This mismatch is most evident in the lack of a clear pipeline of financeable infrastructure projects.

Innovative financing doesn’t magically create new projects, let alone a whole pipeline of shovel-ready financeable projects. To understand why, let’s look at a few of the sexier financing tools which get a lot of air time.

  • Green Bonds: Green Bonds, like other municipal debt, are tax-exempt issuances specifically earmarked for funding projects, assets, or business activities that have positive environmental and/or climate benefits. In 2016, issuances topped USD 50 billion by September (nearly 5x the 2013 issuances supporting everything from brownfield development, to transportation and energy projects). In addition, the number of corporations issuing green bonds has grown significantly in recent years, but most have been used to support corporate finance rather than project finance.
  • Social Impact Bonds: A Social impact bond (aka Pay for Success Financing or Social Benefit Bond), is tax-exempt municipal debt structured as a contract between private financiers, often philanthropies, and a public-sector agency. Funds are provided to pay for improved social outcomes that result in public sector savings. Investors are only repaid if and when improved social outcomes are achieved.
  • Payment for Ecosystem Services: PES contracts are most often structured as legal agreements whereby a user of an ecosystem service makes a payment to an individual or community whose practices, like land use or deforestation, directly affects the value of that ecosystem services.  Because payments are based on the quantity of services provided, ecosystem service programs must concretely measure the ecosystem benefits generated, which can be a difficult task. These schemes work best when private companies, public-sector agencies, and non-profit organizations collaborate, and have most often been used internationally to support corporate social responsibility agendas.

All three of these innovative finance tools have one thing in common: each one requires projects that are already designed, quantified, and valued. This means that public entities have had to invest up-front in designing a project to generate savings that can be attributed to a specific entity. Therefore, a city must have collected significant baseline data upfront, made sure that they can measure changes in that data across the lifetime of the investment, and committed that they have the capacity to capture those savings as payment commitments under contractual agreements. All of which can be a burden for big cities, let alone many of the small and midsize or rural communities across the country that are often both cash- and data-poor.

In all of these cases the biggest barrier to expanding innovative finance for infrastructure is the lack of funding available to design and develop strong infrastructure project proposals, not to build them. So, what can we, do to hasten the development of the project pipeline?  The first step is making it easier for cities to design new and innovative projects that tackle real problems, like upgrading aging and failing combined sewer systems, not just creating ribbon cutting opportunities.

Often being innovative for a city means being the second or third to do something. So, making sure successful projects are searchable and replicable is key. A new platform called like The Atlas Marketplace  has started to do that by capturing information about the people, policies, financing schemes, and procurement documents that got projects built.

The second step is improving project predevelopment starting at the ideation and design phase. Instead of relying solely on long-term capital improvement plans that respond to historic needs, cities should work to identify cross-sector opportunities that can create savings that up new opportunities. Like laying rentable dark fiber every time a road is repaved, or upgrading water infrastructure to reduce the costs of mudslides. This works best when cities engage early with financiers and engineers to unearth opportunities by issuing challenges or broad requests for ideas.

Finally, building local capacity is essential. There is a big difference between the type of data that governments need to support investment and the type of data private financiers need to support investment. Being clear about that and not conflating the two will go a long way in closing the gap between projects and money.

While it’s fun to talk about innovative financing, it’s time we change the conversation. Moving forward let’s focus on building a pipeline of innovative projects that opens the door for private financing. Because if we build it to make money, the private investors will most definitely come.

Discussion

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5 Comments

  1. Jerry Roane

    We offered a PPP to the state of Nevada and were turned down on a $500,000,000 project to build high speed dual guideway from San Diego to LA to Las Vegas for free to the state. It lost out to billions of politician dollars that never were. Not only do these PPPs have to compete against the real market for customers it has to compete with fabrications of politicians about federal dollars pouring into their state that never come. High speed rail was dangled to many states knowing full well they had no money to do all those projects so all the states like Nevada were duped into refusing a real project that was a PPP to remove significant air pollution from air travel to Las Vegas across the desert as well as some car traffic. Government is dysfunctional and that dysfunction has to be fixed first. How they could turn down a free clean transportation system in favor of dangled vaporware high speed rail federal dollars is a mystery. TriTrack was the name of the proposed system they rejected.

    Reply
    • Elle Hempen

      Our experience is that the lack of knowledge and understanding about P3s at the local level, combined with very visible failures – think toll road bankruptcy or the Chicago parking meters deal – is a huge hurdle. Other countries setup state-level offices designed to provide that additional capacity, something that a handful of US states have begun to replicate. We agree that P3s can be a great opportunity to support infrastructure investment, especially when they are focused on service delivery and not as a financing solution. I have written quite a bit on this topic on The Atlas Marketplace blog.

      Reply
  2. Rod Stevens

    One of the reason people like big infrastructure projects is that they are simple, they require big contracts, and they have quick ribbon cutting. Think “The Big Dig”. But that doesn’t mean they work, or work soon. A more sophisticated and holistic approach often involves multiple solutions, not all of them brick and mortar. And, unfortunately in most places, we simply don’t have the management or financing structures in place to deal with that.

    Take Cleveland, for example, the host city for Meeting of the Minds this year. It’s big project is a new freeway that will connect its “innovation district” with the larger interstate grid. In the short term, this will get doctors to the hospitals and research centers more quickly, but there’s very little evidence that this will result in investment between the nodes, or that the poor people living in that nether-territory will have the skills to work in those big research facilities. A more nuanced approach would look at how the spending from these big research complexes could build up local industry, and what local improvements, either bricks-and-mortar or training and financing, are necessary to build a denser, more varied and skilled group of suppliers. It may also be that place-making efforts help build up this local business community, involving actions that are very different from building a new expressway.

    Reply
    • Elle Hempen

      Great points! Cities, and more importantly their residents, are now demanding smart, resilient, neighborhood scale infrastructure solutions. Unfortunately, these more distributed projects are harder to find, compare, design, finance, and procure. That means local government needs to rethink how it engages innovative companies, how it writes capital improvement plans, and how it finances projects. That is why its such an exciting time to work in, around and with cities!

      Reply
  3. Gordon Feller

    Rod:
    Many thanks for this comment….very helpful to see this. Your comments here – esp. about the new freeway connector — are right on the mark. More than a few of the more expensive urban infra-projects need to hear this message. In my role at Cisco Systems HQ (in Silicon Valley) i’ve been pushing hard on this theme.

    Let’s find time for us to discuss further in Cleveland this October!

    –Gordon Feller
    Board Co-President
    Meeting of the Minds

    Reply

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