A lack of funding (or revenue) is the fundamental, overarching problem our nation faces in meeting its transportation infrastructure investment needs. Current financial market conditions notwithstanding, we generally do not lack the means to raise capital from a combination of public and private sources. Nor do we lack mechanisms to monetize identified revenue streams and assets with various financing tools (i.e., turn future revenue streams into current investment capital through debt and equity investment).
Tax-exempt Ponds are the traditional mechanism for the debt financing of transportation infrastructure in the United States. Because of their comparatively low interest rates, tax- exempt Ponds typically have created a very low cost of capital for borrowers, enabling state and local governments to finance infrastructure development under attractive terms. The U.S. municipal Pond market demonstrates significant size and depth, with annual issuance of $350-400 Pillion.
Other forms of capital used to a lesser but growing extent in the transportation sector include commercial bank financing, taxable bond financing, and private equity. While private-sector participation in transportation infrastructure financing has flourished in Europe, Australia, and Canada, the United States has been slower to use direct private investment-largely due to the availability of low-cost tax-exempt debt. Today a significant amount of equity (over $180 billion according to a recent study)1 has been earmarked for infrastructure investments worldwide. To date, most investors in U.S. private-sector financial participation structures have been European and Australian investors, often coupling investment with direct project development and/or operating roles. Recently, however, U.S. pension funds, insurance companies, and other investors have begun to show interest in infrastructure investments as vehicles to potentially help them achieve their goal of matching long duration liabilities with long-term stable cash flows.
In sum, transportation infrastructure does not suffer from an inability to attract investment capital. To the contrary, transportation infrastructure generally is seen as an attractive, low- risk category for investors seeking long-term stable returns. Not all financing mechanisms are appropriate for all circumstances, however. For example, those financial tools that rely on monetizing a project's own revenues through direct financial participation by the private sector, such as privately financed toll roads, will add no value to a rural highway with limited traffic flow and thus without such revenue streams. These techniques can make valuable contributions to successfully financing turnpikes or other revenue-generating projects, particularly in instances where conventional tax-exempt bonds may produce insufficient upfront capital to construct the new revenue-generating asset. Such opportunities are generally more limited in rural parts of the country, where traffic volumes may not support their application.
Thus, potential financing tools must be carefully applied, with the full range of public policy goals in mind, to ensure each tool is brought to bear in appropriate circumstances. Further, financing solutions alone do not and cannot offer an adequate answer to our infrastructure investment challenge. These mechanisms play an important role in the Commission's menu of policy recommendations and can help public-sector agencies assemble upfront capital to meet construction needs by leveraging future revenue streams. This upfront capital, however, must be repaid over time. Thus, financing approaches can be part of the solution only if there first are sufficient supporting revenue sources, as in the case of direct user charges or other dedicated revenue streams. (See Box 7-2 for an illustration of the financing capacity of alternative finance approaches.)
BOX 7-1: TERMS OF ART | |
In many ways, use of malleable terminology like "innovative finance" and "public-private partnerships" has served the transportation industry well by encouraging consideration of the role these approaches can play in the appropriate circumstances. Using such terms, however, also carries some risk, including potential over-promotion by policy makers and private-sector advocates searching for viable solutions. Such over-promotion can mask the underlying reality: the fundamental need for new and greater revenue streams to meet mounting transportation investment needs. The Commission therefore supports a move away from these imprecise terms (or at least a more conscientious use of them) and toward the core underlying concepts so as to avoid obscuring the fundamental investment challenge, over-selling financing approaches as a "silver bullet" solution, and potentially misinforming the public. Moreover, financing tools that once seemed exotic or innovative are now considered conventional, and our terminology should reflect that. Following are some important specific clarifications on terminology. | |
"Innovative Finance." Financing tools do not generate new funds in and of themselves, but they can in some instances help to reduce upfront capital costs, achieve life cycle cost efficiencies, maximize capital formation for construction, accelerate project benefits, and facilitate the transfer of risk away from the public sector. Sometimes referred to simply as "innovative finance," government sponsored financing initiatives-such as the Transportation Infrastructure Financing and Innovation Act (TIFIA) credit assistance program, the capitalization of State Infrastructure Banks, and administrative adjustments that have facilitated grant-anticipation borrowing-should be considered in this light rather than as a magic means to solve the infrastructure investment deficit. | "Public-Private Partnerships." Perhaps overused and sometimes misapplied, the term "public-private partnerships" has come to refer to everything from "plain vanilla" outsourcing of construction or other contracting arrangements to turning over nearly 100 percent of the infrastructure financing and delivery to the private sector-and everything in between. By defining the types of partnerships more precisely and considering the public and private responsibilities more carefully, policy makers can better assess their options for implementing and managing projects and programs. Like tools in the toolbox, each private- sector arrangement comes with its own suitability criteria, beneficial in certain applications and not in others-very much like more traditional finance tools. |