Publications

- February 1, 2021: Vol. 8, Number 2

Innovations in infrastructure finance and ideas from ‘Amtrak Joe’

by Clive Lipshitz and Ingo Walter

President-elect Biden and the 117th Congress must craft bipartisan infrastructure legislation early in the new administration. We’ll focus on public infrastructure since the market for financing private infrastructure is efficient. “Amtrak Joe,” who regularly commuted during his years in the Senate, is well aware of the need for innovation in financing public infrastructure.

Hopes for similar big ideas were dashed during the Trump administration. They were promoted during the Obama, George W. Bush and Clinton years. Not much happened.

Yet, for more than two centuries, it was massive infrastructure projects that gave rise to new frontiers and robust economic development. Among them: the Erie Canal, the Transcontinental Railroad, the Panama Canal, the TVA and the Interstate System. Critical to these was the harnessing of private, state and federal government resources.

State and local governments own almost all public infrastructure, limiting the financing role of the federal government. Moreover, federal financing tends to be a zero-sum game between the states. While muni debt has been the primary source of financing for public infrastructure, the scale of the investment gap, state of public finances, and need for customized financing suggest that a different approach is needed. There’s ample available capital; unlocking that capital requires imaginative and innovative solutions.

Consider the latent value in public infrastructure. Asset recycling plows proceeds from concessions on existing assets into new projects. The federal government could incentivize this through a revolving fund allocating capital to new projects.

Governments own large pools of assets whose value could be unlocked to finance new projects, especially at today’s ultra-low interest rates.

Value-capture extracts value from real estate development that benefits from new infrastructure … to help finance that very infrastructure.

P3s have been under-utilized as a financing tool. One impediment is jurisdictional, since infrastructure often crosses state boundaries. The patchwork of procurement legislation and practice, differences in concession terms, and infrequency of new projects make it very difficult to develop expertise in P3s at the state and local level.

What’s needed is a regional approach. The federal government can fund regional P3 centers tasked with prioritizing projects in various parts of the country, standardizing concession terms, overseeing engagement of private-sector partners, and monitoring adherence to concession terms.

Lastly, the $4.4 trillion public pension system has been untapped as a source of capital for infrastructure. Tax-exempt muni debt is unattractive to pension funds. Yet pensions depend on taxpayer revenues as their primary source of funding, and modern public infrastructure is fundamental to a robust and stable tax base. Moreover, predictable, inflation-protected cash flows are a perfect match to pension liabilities. Let’s find ways for pensions to invest in infrastructure.

Investing in distinct projects is beyond the capabilities of most pensions, nor is it prudent. A solution is pension consortia where groups of pensions — perhaps with private sector involvement — invest in portfolios of infrastructure projects.

The incoming administration and Congress will face numerous challenges at what will hopefully be the tail-end of the COVID-19 pandemic. Now is the time to identify creative bipartisan solutions to ensure the long-term resilience of our critical public infrastructure.

 

Clive Lipshitz is managing partner at Tradewind Interstate Advisors and a guest scholar at New York University. He can be reached at clive@ti-advisors.com. Ingo Walter is a professor emeritus of finance at NYU Stern School of Business.

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