Big-Money Optimism but Many Unanswered Questions About Private Infrastructure Investment
Posted at 8:25 a.m. on June 23, 2014
Senate Finance Chairman Sen. Ron Wyden spoke for many transportation officials when he said recently, “There are hundreds of billions of dollars in private capital sitting on the American sidelines. Surely some of that can be invested in American infrastructure.”
Probably no topic is hotter right now in the public infrastructure world than private-public partnerships, which aim to entice the owners of those hundreds of billions of dollars of private capital to invest in rebuilding and expanding the nation’s highways, ports and bridges.
But getting capital off the sidelines and invested in infrastructure will take not only incentives from Congress, but also practitioners from private infrastructure finance firms.
One of those practitioners — Tom Osborne, executive director of infrastructure for IFM Investors — spoke to The Container about the road ahead for public-private financing.
“There have been a number of proposals put forward for infrastructure financing authorities or a national infrastructure bank. They all have similarities,” he said. “The idea is to use federal capital in support of projects that might not be able otherwise to attract private-sector investor capital, because either their risks are not appropriate or the returns are inadequate or both. Having support for projects like that could be very helpful.
“Good examples would be projects of regional or national significance that cross state lines where the federal government, by providing some support, could help these projects move forward by providing low-cost subsidized subordinated financing” in the same way that TIFIA (Transportation Infrastructure Finance and Innovation Act) loans do.
“We haven’t historically had to rely on private-sector capital as much because low-cost muni funding was available for bond issuance to support infrastructure,” Osborne said.
But he added, “The challenge now is there is this legacy of under-investing in infrastructure, of kicking the can on maintenance, and of under-charging relative to the true cost of service. So we’re now in a situation where the traditional funding sources are inadequate to meet the needs.”
A national infrastructure financing authority could be beneficial in screening out overly costly, but only marginally useful projects, Osborne said.
A national infrastructure financing authority could “help vet projects and ensure that those that are getting the capital funding benefit that public support can provide are the ones that are appropriately prioritized against other projects and not just local pork.”
The design of a public-private partnership is crucial – deciding who will be responsible for not only financing a project, but building it and maintaining it over many decades, Osborne said.
“There are advantages in whole-life project costs for doing what are called DBFOM [design-build-finance-operate-maintain] -type contracts because there is an incentive on the part of the concessionaire responsible for those activities to ensure that they design the road and build the road or the project in a way that will minimize their costs while providing adequate service reliability over the life of the project.”
He added, “If, by contrast, you have a different entity responsible for designing, and a different entity responsible for building, and then the operation and the maintenance gets handed off to yet a third entity, there could be short cuts taken along the way because the party ultimately responsible for operating and maintaining was not involved in the design and the build..”
Using cheaper materials might result in higher profits for the construction firm in the short run, but prove costly in the long run for whoever maintains the project.
According to the Congressional Research Service, the $2.7 billion I-635 LBJ Managed Lanes project near Dallas is an example of a DBFOM. It is being built by LBJ Infrastructure Group, which includes the Texas firm Cintra. The private investor group has the right to lease the highway from the state for 52 years.