How are we going to pay for the infrastructure?
An important, but often confused, distinction to draw when considering the financial elements of an infrastructure project is that between funding and financing. The funding for a project is its long-term source of support. In the case of public infrastructure, this may be revenues generated by the project, dedicated tax revenues or general resources of the sponsoring public sector entity. The financing of a project is the means by which the funding is leveraged to provide enough up-front cash to purchase, construct or adapt the project. It is important to note that, while there may be many creative financing vehicles available, once the funding structure is established, all of these financing vehicles will be "securitizing" the same project economics.
Historically, U.S. public sector entities have supported infrastructure development through pay-as-you-go cash funding or debt financing through a myriad of credit structures and instruments. Given already overstretched budgets, dismal fiscal outlooks for the near to medium term, and a general reluctance to raise taxes and impose new fees in the current economic climate, most public sector entities will be challenged to fund a slate of new projects to rehabilitate existing assets and enhance current capacity on a pay-as-you-go basis. Likewise, borrowing capacity for many public sector entities is constrained, and credit positions have been weakened by fiscal stress, making access to credit-sensitive financial markets more difficult.
In this atmosphere, partnership structures may prove appealing for many public sector entities. They may consider partnership structures that reduce the public sector's capital payments over the lifetime of the asset (or contract), monetize existing assets to pay for new ones or allow for financing by the private sector that does not eat into public debt capacity. Using PPPs to raise private capital for public projects can help to spur job creation when projects would otherwise be put on hold. This, in turn, can enhance public sector revenues through associated tax revenue.