Bulletin 2: Perspectives on Private Financing for Public Infrastructure

This second bulletin in our series highlighting local IIJA/BIL implementation efforts focuses on Private Financing and Innovative Delivery in Public Infrastructure. In partnership with the Nowak Metro Finance Lab, this series contextualizes local infrastructure efforts within the six key strategies outlined in our IIJA Federal Investment Guide. To read our first bulletin, click here.

As cities consider opportunities under IIJA/BIL, innovative models, private financing and P3 may help catalyze or complete important projects. This bulletin features the thoughts of key private sector leaders within the Accelerator’s network who are committed to realizing the full community impact of the IIJA/BIL:

Denise Turner Roth - President, Advisory Services - WSP USA
Denise was appointed President of US Advisory Services in July of 2019 after serving as WSP’s Chief Development Officer, elevating client engagement and communications and aligning those functions with WSP’s growth strategy. Prior to joining WSP, Roth led the U.S. General Services Administration, the federal agency responsible for government property management and procurement. In this role she championed GSA as an economic catalyst to align federal investments with local investments to stimulate economic development. She previously was city manager for Greensboro, NC, where she generated more than $75 million in city enhancements.

DJ Gribbin - Founder - Madrus, LLC
DJ is the founder of Madrus, LLC, a strategic consulting firm dedicated to developing critical infrastructure more efficiently. Before the founding of Madrus, DJ served in both the public and private sectors working on P3s. In the public sector, he served in the White House as the nation’s first Special Assistant to the President for Infrastructure. DJ also served as General Counsel for the U.S. Department of Transportation and Chief Counsel at FHWA. In the private sector, he led Macquarie’s P3 sell-side advisory practice, representing state and local governments.

Jim Ray - Corporate President - HNTB
Jim serves as Corporate President for HNTB Corporation, providing financial, policy, and legal advisory services to transportation executives for strategic management of capital assets and infrastructure investment. Prior to HNTB, Jim served as Senior Advisor for Infrastructure to the US Secretary of Transportation, Acting Administrator for the Federal Highway Administration and Deputy General Counsel for the White House Office of Management and Budget.

After interviewing these experts on local public-private partnerships and the uses, benefits and inherent risks of pursuing private financing for infrastructure, we identified six key takeaways:

1. Infrastructure needs far exceed the funding available in IIJA/BIL. Private financing could help close that gap.

Denise Turner Roth: “The infrastructure bill provides significant amounts of additional federal funds for different types of infrastructure. However, federal funds almost always require a local ‘match,’ defined as a share of the project costs that is not covered by federal dollars but another non-federal source of funding, state, regional, county or municipality-level, etc. Resources for local infrastructure funding vary significantly across the country and even within a state. Infrastructure funding needs are sometimes highest in areas that have historically been disadvantaged and have limited capacity to provide the local federal match.”

Jim Ray: “There’s a reason why states and locals have stepped up their infrastructure funding over the past ten years, because the built environment is deteriorating. Transportation systems have eroded in metros. We have “freight bottlenecks,” or what I refer to as the ‘heart-attack map’ – pinch points where tractor trailers get delayed. If a tractor-trailer is traveling from Long Beach to Detroit, they may have to wait four or five days until they’re in a bay. Our network that Eisenhower built and its efficiencies have degraded. The short answer is, the need far outweighs even what Congress just passed. We need private capital for the same reasons we need other public sector capital, because the country needs it.”

2. Private financing often makes the most sense when paired with the shared risk-reward of a true P3 delivery model.

DJ Gribbin: “The private sector doesn’t provide funding; it provides financing. This is the biggest misunderstanding in P3s. The private sector provides financing and governments are going to have to pay it all back with interest. If private capital is use by a government, it will pay more for that capital. In public-private partnerships (P3s) the financing costs will be higher, but the design, construction, operation, and maintenance costs will be lower over the life of the asset. Because governments can borrow using municipal debt, access federal grant funding, or use existing cash, the question for state and local governments is, will the higher private financing costs be more than offset by reductions in design, construction, operations, and maintenance costs?”

3. What specific IIJA/BIL projects are best suited for private financing and/or P3s?

Jim Ray: “The ones that will be heavily utilized are those more squarely geared toward private sector operation, like EV charging. I haven't talked to a single public entity that wants to get into the EV charging business -- they want to facilitate it, they want to drive it, but they don’t want to be in that business, per se. Those will lend themselves to innovation.”

Denise Turner Roth: “BIL funding programs such as the Federal State Partnership for Intercity Rail include provisions for multi-year funding agreements and could be a candidate for Grant Anticipation Note (GAN) financing. In addition, FTA and FHWA formula funds, given their recurring and predictable revenues, have been leveraged through the issuance of Grant Anticipation Revenue Vehicles (GARVEE) bonds. Competitive grant funds are not viewed as an acceptable security for debt given their discretionary nature and lump sum payment structure.”

4. Climate and resilience projects may be an opportunity to draw in specific sects of private capital centered on social impact and sustainability.

Denise Turner Roth: “Paying for preparedness activities that impact resiliency is a challenge for cities and states that can also be addressed through a number of unique financing instruments. These activities include both physical infrastructure improvements and business readiness improvements. Costs associated with recovery following resiliency efforts are also central to this discussion for two reasons: funds are more effectively used for preparedness than recovery, and some instruments, such as resilience and catastrophe bonds, can fund preparedness through the associated reduction in risk. In the Environmental Impact Bond (EIB) model, projects with societal benefits such as green infrastructure (GI) projects to improve stormwater quality and increase local flood resilience, are funded by impact investors who have a particular desire to provide capital to this category of projects.”

DJ Gribbin: "The C02 Infrastructure Finance and Innovation Act (CIFIA) financing is new, for carbon pipelines, which don’t exist yet, but if you were to build one, you could qualify. It’s a forward-thinking climate change lending program, to be used for hydrogen or carbon capture projects, and transporting it to be stored underground or used commercially.”

5. By our count, 135 IIJA/BIL programs require a local match, but most states/localities don’t have that money up front. Will they borrow it from private sources? Will new private financing models be created and adopted? What existing systems will remain the standard?

DJ Gribbin: “The private sector could be very helpful in situations where there’s not cash available up front, but where there will be cash available over time. It’s like a loan. One alternative option for local governments would be to reallocate budget funding in a way that covers the potential match, that can be backfilled later with other funds. They could do a P3 in another area where they get cash up front, and then use that cash to cover the match requirement - it doesn’t need to be on the same project. Say you wanted to do a street lighting project, and as part of the project you want a $50M payment up front from the concessionaire. You could then take that $50M and use it as the non-federal match for, say, funding water infrastructure. In this case, the government is effectively borrowing the $50M, and it is going to pay a bit more for financing the street lighting to the concessionaire, but the $50 million can be used to capture the federal water grants that otherwise wouldn’t have been available. Governments should consider expanding the value of money study to include their whole infrastructure program, and places where they are able to tap into and get cash today, they could use to make non-federal funding to match grants somewhere else. Economically it would make a world of sense. I don’t know that anyone’s ever done that, but we’ve never been in this world before.”

Denise Turner Roth: “Some projects may have a real estate component or other value capture methods to close a funding gap. For example, WSP is currently advising a private developer that won a $20 million BUILD grant to develop an autonomous vehicle transit system and bike/pedestrian improvements in their 60-acre mixed use community. The federal match is coming through the developer’s contribution of land and funding for the transportation network. Tax increment financing (TIF) and payments-in-lieu-of-tax (PILOT) approaches can provide gap financing to governments. This allows infrastructure improvements (transportation, water, energy, etc.) to be built with the promise of future funding that will be created by the incremental increase in tax revenue from private development. This has been used in convention centers, sports stadiums, planned-unit developments (PUDs), and other real estate projects.”

6. Think about how an infrastructure project (road, rail, shared-use amenities) can catalyze other redevelopment, like affordable housing and Transit-Oriented Development (TOD), and present opportunities to create and access creative financing or multiple federal funding sources.

DJ Gribbin: “Traditionally governments would have grant funding available, and they would also have TIFIA or WIFIA available. There are projects like Denver Union Station which had highway funding (FHWA), public transit (FTA) and rail (FRA) funding involved. Normally, developers will avoid the complexity of projects with multiple funding sources. They do not want to blend money from different federal agencies together, because every agency has its own requirements. You can get stuck, unable to comply with various rules that may be at odds with one another and will have to negotiate your way around different rules. If I’m developing a project, as a general rule, I do not look for multiple sources of funding from different federal agencies. Usually it’s best to have one federal program, with one set of rules. That said, there’s this whole game theory component that comes with BIL grants. As one example – I can think of an urban bridge, located in a disadvantaged area that is eligible for 11 of the new competitive grant programs. How do you play that? Apply for all 11? Just 1? Apply for grants amounting to the cumulative total of project costs? Twice your project costs? It’s going to be unbelievably complicated and interesting. There’s so much overlap between the different programs. The savviest applicants will be thinking about how to layer.”

Denise Turner Roth: “The TIFIA program provides low interest loans (or credit assistance) that can be subordinated to other debt for transportation projects. It offers very patient repayment terms — 35 years from project completion is typical and with up to 70 years possible depending on the useful life of the assets financed. Moreover, repayment can be delayed up to five years after the project has been completed. A TIFIA loan can finance up to 33% of the eligible project costs. While the application process is fairly extensive and successful applicants must meet ongoing reporting requirements, many sponsors of complex infrastructure projects have found TIFIA loans instrumental in forging a successful financial plan by more efficiently leveraging an available revenue stream with TIFIA in a subordinate (junior) lien, lowering overall borrowing costs, and/or shaping debt repayment around a growing revenue stream forging a successful financial plan. Beyond TIFIA’s transportation focus, there are parallel credit assistance programs, including water infrastructure (WIFIA), railroad capital improvements (RRIF), and the BIL created a new CIFIA program for carbon capture and storage projects.”

For Inspiration: we also wanted to share with you examples of successful projects utilizing private financing and partnership for public infrastructure,

Denver Eagle P3: Eagle P3 is part of the Regional Transportation District’s (RTD) 2004 voter-approved FasTracks plan to expand transit across the Denver metro region. The $2.2 billion project, completed in 2016, comprises the University of Colorado A Line and G Line, the first segment of the B Line to Westminster, procurement of 56 commuter rail cars and a commuter rail maintenance facility, which are all scheduled for completion in 2016. Funding for Eagle P3 comes from federal grants and loans, RTD sales taxes and the contractor’s financial contribution, including $1.03 Billion from the FTA and $450 million in private financing. RTD entered into a 34-year agreement with Denver Transit Partners (DTP) under which it will pay DTP to operate and maintain the system. DTP repays its private financing from that amount, much like home mortgages are repaid. The lines have averaged 96% on time performance and served more than 35 million passengers.

The District’s Yards Park: Jim Ray cites The Navy Yard in D.C. is one of the most successful examples of TOD in the country: “A bunch of government buildings sitting on the (Anacostia River) waterfront not doing anything. Then transit (WMATA), the Nationals ballpark, and USDOT created a foothold. Now, there’s a much stronger tax base, and it is remarkable what that has done for the city. There’s been a huge leveraging effect.” Completed in 2010, Yards is the only park in DC run by a private entity rather than the National Parks Service. The Capitol Riverfront Business Improvement District (BID), a 501(c)(6) nonprofit led by Michael Stevens, partnered with the city to develop the former naval manufacturing facility into a 500 acre park complete with transit, retail spaces and weekly special events, including a seasonal concert series. Stevens attributes the park’s success to the BID’s ability to move much faster than a government entity on contract procurement and development.

Kansas City International Airport: Kansas City partnered with Edgemoor Infrastructure and Real Estate LLC on the development of a new $1.5 billion, 39-gate, 1 million square foot terminal. Edgemoor provided the city with a variety of financing solutions including debt/equity financing and 100% tax-exempt debt. KC chose the 100% debt solution, saving approximately $90 million in financing costs. Edgmoor also agreed to include minimum goals for 20% participation from minority-owned firms and 15% participation from women-owned firms. Per the Kansas City Aviation Department’s Annual Report, the first phase costs of the projects were funded through the city’s largest bond package in city history -- $887.7 million in bonds ($826.05 million in Series 2019B Special obligation Bonds and $61.675 in Series 2019 Special Obligation Bonds). The bonds will be recouped through user and airline fees, with no impact or expectation from taxpayers. The new terminal is set to open in March 2023.

Thank you for joining us and your colleagues around the country in exploring IIJA/BIL implementation through this series. We are grateful for your interest, and encourage you to pass this newsletter along within your networks – and please do not hesitate to reach out if we can be of any assistance to you.

We also thank our experts and the Nowak Lab’s Bruce Katz and Karyn Bruggeman for their dedicated research.

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