Home World Governors’ Initiatives To Enhance Planning, Delivery And Success Of Major Infrastructure Projects

Governors’ Initiatives To Enhance Planning, Delivery And Success Of Major Infrastructure Projects

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Delivering big infrastructure requires a comprehensive, all-hands-on-deck approach to funding, financing and delivery of major projects. The major project development and delivery offices we looked at in the previous chapter should be designed to build strategic partnerships that help maximize the value of an asset portfolio. This section will look at the myriad funding, financing, and partnership mechanisms that can come together to form a solid infrastructure foundation.

Funding

Infrastructure “funding” concerns the ultimate source of project revenue, such as gas taxes or toll collections. Infrastructure “financing” on the other hand is about the structures put in place to accommodate a mismatch between upfront costs and source revenues, such as through state borrowing or P3 arrangements, which will be discussed later.

Infrastructure investments are ultimately funded in various ways across different sectors. Transportation infrastructure in most states utilizes a separate trust fund comprised of user fees such as motor fuel taxes, vehicle registration fees and other sources. These traditionally lucrative funding streams have often been beset by diversions to accommodate other pressing needs and priorities. At the same time, the purchasing power of those funding sources has been diminishing steadily over the last several decades. The federal government, recognizing the critical need for funds to cover growing surface transportation infrastructure needs, have on several occasions transferred monies from the general fund to cover deficiencies in the Highway Trust Fund (most recently through the IIJA).

Beyond transportation projects, more than 50,000 active drinking water systems (not including more than 100,000 non-community water systems, such as those supplying schools and hospitals) and nearly 15,000 wastewater treatment plants throughout the U.S. are funded by user fees that are collected by local governments. In addition, there have been an increasing number of state and municipal broadband networks supported/built out by state and local general funds. In one unique case in Maryland, many environmental resilience projects are funded by local fees and taxes and administered by the quasi-state agency Maryland Environmental Service.

Recognizing the need for federal support to rebuild America’s crumbling infrastructure, as noted earlier, President Biden and a bipartisan group of Senators, with the bipartisan support and collective input from the nation’s Governors, negotiated and passed the bipartisan Infrastructure Investment and Jobs Act (IIJA). The legislation addresses many of the Governors’ policy priorities, including funding and financing needs, fixing existing infrastructure and investing in the future, streamlining project delivery, and encouraging innovation. Despite this generational funding opportunity, many have expressed the view that these funds will nonetheless be insufficient to address existing infrastructure gaps, and that partnerships not only with the federal government, but with the private sector and stakeholders at the local level will be of paramount importance as a force multiplier to help not only restore the country’s infrastructure, but place states and territories on a fiscally sustainable long-term path. The key to this success will be working to make each of these sources of funding and financing work best across the portfolio of infrastructure assets.

Securing Funding from Multiple Stakeholders

In Maryland, growth at the Port of Baltimore has been limited by a lack of double-stack freight rail capacity through the Howard Street Tunnel. In 2019, after important breakthroughs in engineering approaches significantly decreased the cost of tunnel improvements, Maryland received a critical federal INFRA grant that allowed the state to enter into an agreement with CSX, the railroad that owns the tunnel, and the commonwealth of Pennsylvania, to expand the tunnel as well as address capacity constraints along the I-95 rail corridor up through Pennsylvania. Completion of this $466 million project will be a game-changer, creating thousands of jobs and contributing millions to the regional economy, and allow the Port of Baltimore to capitalize on its strategic location as the most inland port on the east coast. This will mean that containers will be able to be more easily transported via rail to America’s heartland and will assist with addressing current supply chain issues across the nation. The project broke ground in November 2021 and is expected to be completed in 2024. A key to the project’s success was the collective funding contributions from all stakeholders that will see benefits.

In Washington, two of the state’s economic engines, the Port of Tacoma and Sea-Tac International Airport, suffered from poor connectivity along congested roadways. In response to these challenges, Washington commenced the Puget Sound Gateway Program, which will build capacity on two critical roadways, the SR 167 Completion Project and the SR 509 Completion Project, to complete critical missing links in Washington’s state highway and freight network. To facilitate the program, the state of Washington combined four different sources of funding: approximately $1.5 billion from the “Connecting Washington” funding package signed into law by Governor Jay Inslee in 2015; $180 million from new tolls; $130 million from local contributions and grants as well as federal grant funding.

Overall, the $2 billion program will help Washington state compete both nationally and internationally by enhancing regional mobility, shoring up critical freight connections, utilizing intelligent tolling solutions, and growing local economies and jobs. In the effort to bring the project across the finish line, the Washington State Department of Transportation gathered key stakeholders to champion the projects, including operators at the Port of Tacoma, customers of the Port from Washington’s vital agriculture community, the trucking industry, and local elected officials.

A Two-Way Street: States Supporting Local Governments to Improve Community Well-Being

Many states offer opportunities for local governments to participate and drive projects that fall somewhere “in-between”—not quite large or complex enough for significant state resources, but meaningful and impactful to local communities that don’t necessarily have the funding to tackle them on their own. In several states, federal fund swap programs allow local governments to benefit from federal funding using state department of transportation federal funding dollars, which come with more navigable requirements and less red tape. A study by the Government Accountability Office in 2021 found that between 2016–2020, a total of 15 states utilized fund swap programs for local governments.

Other states utilize direct grant programs for local governments. For example, Kansas employed their Cost Share Program in 2020 to famously alleviate a deluge of train whistles from a local community. When a railroad increased service around the town of Belle Plaine, residents sought a number of solutions to mitigate the impact, and ultimately settled on seeking a Quite Zone designation from the Federal Railroad Administration. To help with the cost of implementing $160,000 in required safety infrastructure improvements, the state of Kansas came through with a Cost Share grant, which, with adulation from local residents, saved the day and marked the beginning of a rebranding and revitalization of the city.

BEST PRACTICE

Governors are strategically working with federal and local governments, the private sector, and other key constituencies to leverage funding and financing, manage and allocate risks, and incorporate long-term resiliency into projects and initiatives. This has increased stakeholder buy-in for projects but also enhanced their attractiveness when competing for funding through federal discretionary funding programs.

Public-Private Partnerships and Innovative Financing

Public-private partnerships (P3s) are a form of government procurement to build and implement infrastructure using the resources and expertise of the private sector. The Federal Highway Administration defines a P3 as a long-term contract that may include development (design and construction), operation and/or maintenance of a facility, and involves a component of private financing. For major infrastructure projects that fall outside the “business as usual” of government service provision and maintenance, public-private partnerships have shown to be beneficial in the right circumstances. Potential benefits of P3s include:

  • Bridging financing gaps in the face of debt limitations through attracting private investment capital.
  • Encouraging innovation, greater asset utilization and integrated whole-of-life asset management through improved management and operations.
  • Facilitating “value for money” outcomes for the community through assigning risks to the partner best equipped to manage and mitigate potential damage from those risks. If risks are assigned appropriately, private incentives can lead to a reduction in project costs, improved timeliness and greater efficiencies in service delivery.
  • Maximizing public and private positions on taxing structures through allowing a private partner to claim ownership for tax purposes of a road or other type of infrastructure and claim tax benefits (as it would if it owned the infrastructure outright). In this way, “State and local governments can share in the gain from that reduction in tax liability when, as a result, they receive higher bids for a lease than they would otherwise.”

The Luis Muñoz Marín International Airport in Carolina, Puerto Rico offers an example of a project that has been able to generate additional revenue for the Territory and improve service delivery through a P3 concession with the private sector. In 2013, through the U.S. Federal Aviation Administration Airport Investment Partnership Program, Puerto Rico entered a P3 for the long-term concession to finance, operate, maintain, and improve the airport, which is located just three miles from the capital city of San Juan. Upon execution of the agreement, Puerto Rico received $615 million in an upfront leasehold fee, and an annual payment of $2.5 million for the first five years of the agreement, along with 5% of revenue over the next 25 years, and 10% in the final 10 years. In addition, as part of the agreement, Puerto Rico’s private sector partner made an upfront investment of approximately $400 million to renovate terminals, upgrade baggage scanning and improve retail facilities. Another $200 million improvement and expansion plan, including runway reconstruction, structural repairs and terminal renovations will be completed over the next five years. Since entering into the airport P3, the airport has increased passenger counts and its standing in the region as an international gateway.

The Indiana Toll Road offers an example of a P3 concession which has improved whole-of-life asset management outcomes through facilitating investment in strategic capital projects. The Indiana Toll Road project is a 157-mile divided highway that was built in 1956 and spans Northern Indiana from the Ohio to Illinois borders. It was leased by the state of Indiana as a concession in 2006 and acquired by IFM Investors in 2015 through a restructuring. Since working with the private sector to improve, maintain and operate the Indiana Toll Road, the facility has undergone several rounds of capital investment, including an initial $275 million investment in improving roadway quality, $75 million in rest-area and truck parking facilities improvements and the recently completed $34 million fiberoptic communications system linking the entire network from border to border. By 2025, it is expected that 95% of the toll road’s pavement will be entirely reconstructed and will rank among the best in the nation.

In Colorado, the Department of Transportation wanted to achieve a complete corridor solution to Interstate 70 East over a 10 mile stretch in Denver—one of the most heavily travelled and congested highway corridors in the state. In assessing the project, the department considered a range of delivery options, including design-build, design-build-operate-maintain, and design-build-finance-operate-maintain, using a Value for Money analysis. This type of analysis sought to understand which approach would deliver the greatest value to the state over the lifecycle of the project. They key variable between the options related to what risks could be appropriately transferred to the concessionaire, such as construction, operations, maintenance and rehabilitation risks, and whether the transfer of these risks ultimately reduced the costs and cost contingencies facing the public sector (see table above on possible risk allocation approaches). The Value for Money analysis for I-70 concluded that the project was not affordable under a design-build model, but that it could proceed under both a design-build-operate-maintain and design-build-finance-operate-maintain models. The analysis also found that the later model provided more risk transfer and certainty to the Colorado Department of Transportation. In 2017 the Department of Transportation reached financial close for a design-build-finance-operate-maintain concession with Kiewit Meriam Partners and construction is expected to be completed in 2022.

A Global Perspective

Public-private partnerships (P3s) have been successfully implemented worldwide, on a variety of infrastructure projects. These include both user-charge or “economic infrastructure” P3s such as roads, energy and water, as well as availability payment or “social infrastructure” P3s including schools, hospitals and courthouse facilities. P3s have been employed to develop new infrastructure projects or to improve and/or enhance the operation of existing facilities.

A report recently released by the Global Infrastructure Investment Association and DLA Piper provides an overview of the global infrastructure investment market and the different approaches taken with P3s. This paper found that among eight large P3 markets there were around 50 projects that closed with a value of around $26 billion in 2020. Apart from the U.S, two of the largest markets for P3s globally are Australia and Canada.

There is a long history and significant experience in the use of P3s in Australia. On average around 10% of total government infrastructure procurement are P3s, with a focus on large scale or mega projects (for example, the Westconnex motorway system in Sydney). P3 projects are generally viewed favorably in Australia given their focus on providing value for money for the taxpayer through appropriate risk allocation. Australian P3s have generally performed well, with average construction cost overruns and construction delays significantly lower than traditional projects. P3s have occasionally been criticized in Australia on the basis that governments can borrow more cheaply than the private sector can. However, the public sector comparator used to assess Australian P3s adds on a “premium” for the implicit risk that the public sector bears in any potential project to ensure a like-with-like comparison between procurement options.

Like Australia, Canada has a robust P3 market which has developed since the late 1990s. There are currently over 100 P3 projects across all sectors and regions in the planning, procurement or construction phase. Projects in Canada are based in most part on availability payment models where users of the facility do not shoulder the costs directly, and there appears to be little appetite for this approach changing. Canadian P3s often include community benefits as key contractual commitments, such as the use of apprenticeship programs or the use of labor from under-represented groups. Increasingly, the market has moved to one where project contractors take ownership positions in the private sector component of the project, rather than one driven by pure equity investors. Overall, there has been a good track record of delivering projects on time and on budget through the P3 model, and the use of this type of procurement approach is viewed very favorably in Canada.

The recently passed bipartisan IIJA incorporates several provisions that promote the use of P3s. This includes a new requirement for projects over $750 million and seeking financing assistance through Transport Infrastructure Finance and Innovation Act or Railroad Rehabilitation and Improvement Financing programs to complete a value for money analysis, which requires assessment of different procurement options. The IIJA also incorporates a new five-year $100 million technical assistance program to assist states, localities and tribal governments with innovative financing and asset concession planning. Additionally, the law requests that the Secretary of Transportation submit to Congress an “Asset Recycling Report”, that includes an analysis of impediments to increasing the use of public private partnerships in transportation and proposals for approaches that address those impediments.

During Maryland Governor Larry Hogan’s 2019-2020 Chairmanship, NGA led an international study tour to Australia to explore the country’s innovative approaches for developing, securing and financing roads, mass transit, ports and other infrastructure. Gov. Hogan visited Australia in support of his initiative as NGA chair, Infrastructure: Foundation for Success, which sought to build on international successes in furnishing and maintaining the physical assets that are crucial to economic competitiveness and quality of life in states and territories.

Gov. Hogan and other U.S. leaders, including Colorado Lieutenant Governor Dianne Primavera, Louisiana Secretary of Transportation and Development Dr. Shawn Wilson, and Washington Secretary of Transportation Roger Millar, visited Port Botany, the WestConnex civil works project and Sydney Metro’s Martin Place station to learn about innovative tools Australia uses to finance major infrastructure projects and explore modern construction approaches. One of the areas of focus was Australia’s asset recycling program, in which a state sells or leases assets such as ports and airports to the private sector and applies the proceeds toward new infrastructure, using incentives from the federal government. Investment is enabled in Australia by the presence of multi-billion-dollar “superannuation” funds that are essentially compulsory retirement savings accounts.

BEST PRACTICE

When considering the use of public-private partnerships, many states and territories are adopting the practice of identifying which parties are best able to manage risks and distribute such risks accordingly. This can create the right incentive structures and thus lead to project efficiencies in both time, money and innovation that will pay off in the long run. State efforts have demonstrated that good project management and strong partnerships are necessary ingredients to the success of any major project.

State Bonding Initiatives

As examined in NGA’s prior memo on funding and financing mechanisms, states and territories rely on a variety of financing options to complete projects, typically with low cost or tax-exempt interest rates. Every state issues tax-exempt municipal bonds to finance capital for transportation projects, fund day-to-day operations, or both. There are a variety of bond structures used for transportation, including general obligation bonds, revenue bonds, and federal debt financing tools, such as private activity bonds and Grant Anticipation Revenue Vehicle bonds.

As discussed in Chapter 2, Governor Gretchen Whitmer of Michigan utilized administrative actions to issue state road bonds to generate $3.5 billion in additional funds for road improvements, with the purpose of adding or expanding 122 major new road projects. During her 2020 state of the state address, Gov. Whitmer said that the “Rebuilding Michigan plan will ensure we start moving the dirt this spring and save us money in the long run.” A release from the Governor’s office observed that “moving projects ahead 4-6 years allows MDOT to save taxpayers money by avoiding the annual cost of inflation.”

In 2020, Connecticut authorized up to $1.6 billion in special tax obligation bonds for transportation infrastructure improvements, covering FY2020 and 2021. Improvements included highway and bridge construction and maintenance, mass transportation and transit facilities, waterway facilities, and DOT maintenance and administrative facilities. Debt service on these bonds is paid from the dedicated revenue stream of the Special Transportation Fund, including motor vehicle fuels tax and oil company taxes. According to a report by state Treasurer Shawn T. Wooden, state treasurer’s office bonds help leverage federal funds by providing the required state match for federal transportation funding, and that this will be important as the state looks to take advantage of the significantly expanded funding coming from the IIJA.

Maine Governor Janet Mills signed legislation placing a $100 million bond issue on the ballot, which was approved by Maine voters in November 2021. The bond measure dedicates $85 million for surface transportation, construction and maintenance and $15 million for pedestrian, bicycle, port, rail and aviation facilities. Funds derived from this bond will form a critical part of the agency’s three-year work plan and will allow Maine to leverage up to $250  million in federal funding. Also, in early 2022, the Hawai‘i Department of Transportation said that its Airports Division had sold new Airport System Revenue Bonds to fund $230 million of essential capital projects to modernize and expand air service facilities statewide. The bonding measure also took advantage of low interest rates in the municipal bond market to refinance $57 million in prior bonds with associated cost savings.

In May 2021, Lois Scott, chair of the Milken Institute’s Public Finance Advisory Council and former chief financial officer for the City of Chicago suggested that “with a cohesive federal infrastructure strategy, favorable bond markets and greater understanding of state and local budget realities, the vital signs [in state and local financing] will improve substantially.” She suggested that “facilitating their access to capital lies at the very heart of creating greater equity in our communities,” and provided several insights into how states and local governments can capitalize on the fact that the municipal bond market is a high performing asset class. In particular, she underlined the importance of putting “a big gold star on the cover of every municipal bond prospectus highlighting the good it is doing for that community and setting it apart from investments in corporate bonds to buy back stock.”

Green Bond Market

Some states are entering the growing “green bond” or “climate bond” market, funding projects with environmental or climate-related benefits ranging from clean or renewable energy installation to energy-efficient building programs. These bonds are structured traditionally but are affixed with the climate or green labels by the issuer or conferred by a certifying organization. These bonds allow states to signal the importance of the environmental outcomes of a given project or suite of projects to potential investors.

In New Jersey, the Murphy Administration sold $122.5 million Environmental Infrastructure Bonds in June 2021. The bonds will leverage Department of Environmental Protection zero-interest loans to provide a total of $386 million in projects financed through the Water Bank. The projected funded include green infrastructure, sewer system collection and treatment improvements, drinking water treatment and distribution system, enhancements and projects to reduce sewer overflows. 

In 2019, the Connecticut Green Bank achieved Climate Bond Standard Certification for $38 million issued through the state’s Solar Home Renewable Energy Credit program. The proceeds are being used to fund the Residential Solar Investment program, which was created to fulfill state policy adopted in 2015 that mandated the installation of 300 MW of new residential solar by 2022. The Green Bank is moving to accomplish this ahead of schedule, and will track job growth, tax revenue generation, air pollution reductions, public health improvements, and equitable access to clean energy arising from the program.

In 2018, the World Bank announced a partnership with the state of California to invest $200 million in World Bank green bonds, pushing the total amount of green bonds purchased by the state to $1.5 billion. These bonds provide California with competitive yields while supporting the growth of a sustainable low carbon economy. In announcing the move, then California State Treasurer John Chiang acknowledged that “we must build, so let’s build green. Let’s build to protect ourselves from rising sea levels, from extreme weather, and to ensure prosperity for our children and grandchildren.”

BEST PRACTICE

States and territories have started highlighted the value that investment in the public sector will have on the larger societal and social good when issuing debt. This can be through debt issued through green or environment bonds, which are targeted to certain initiatives such as environmental remediation or clean energy.

State Revolving Loan Funds and Infrastructure Banks

State Infrastructure Banks are revolving funds established and operated by a state (frequently within a state’s department of transportation, or equivalent agency) with the capacity to offer direct loans and various forms of credit to finance infrastructure projects. State infrastructure banks can benefit from direct federal funding and federally-sponsored financing, such as TIFIA. Like economic development authorities, state infrastructure banks can support a variety of state and local governments and regional entities with responsibility for developing and delivering infrastructure solutions.

At the start of 2021, Nevada Governor Steve Sisolak reinvigorated the Nevada State Infrastructure Bank with $75 million to create a “robust pipeline of critical infrastructure projects that will put people to work.” The funding of the state infrastructure bank will allow state and local infrastructure projects to be prioritized centrally and will potentially allow the state to best maximize federal dollars dedicated to infrastructure. This investment of $75 million is projected to allow Nevada to advance up to $200 million in new infrastructure investments in 2021, and a combined $1 billion in new investments over the next five years, creating more than 30,000 jobs by 2031.

In 2017, the Indiana Finance Authority applied to the Environmental Protection Agency’s water financing program, “WIFIA” (Water Infrastructure Finance and Innovation Act), and received a $436 million loan. WIFIA funds support larger state-wide projects and projects with regional significance. Combined with the state’s uncommitted State Resolving Fund balance of $453 million, the loan allowed Indiana’s Finance Authority to lend nearly $900 million to 23 wastewater and drinking water projects across the state, serving a combined 1.2 million people.

In 2019 and 2020, several states followed this approach, including the New Jersey Infrastructure Financing Authority, the Rhode Island Infrastructure Bank, the Iowa Finance Authority, and the California State Water Resources Board. These states all applied to WIFIA loans with a mixture of projects that were eligible within their clean water and drinking water state revolving funds.


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