Who would have thought that the various urban centers of North America were more like businesses in the same sector, in deep competition to thrive or survive? Of course, we know that virtually every city has long sought to present itself as more attractive than others – climate, amenities, culture, employment and business opportunities – as a way of attracting residents and businesses, the sources of tax revenue-based prosperity.
Today, our urban areas face enormous threats and costs including those associated with the quality, integration and performance of their civil infrastructure systems. I use the word systems intentionally because we have slowly come to realize that our civil infrastructure was never really merely a collection of standalone pieces even though we typically designed, financed and built them that way. We now more clearly appreciate that infrastructure is in essence an interrelated and integrated system. Think of infrastructure as the skeletal, circulatory and digestive systems of the organisms we call communities. And like any organism, we are trying to maintain a healthy and functioning relationship between all the interdependent parts, which in today’s interconnected reality is most often at the regional rather than purely local scale.
In the old world order, infrastructure owners made choices considering priorities, borrowing capacity and tax-based revenues, often building what could get funded or just part of what was needed, for lowest front-end cost. Municipalities lined up for formula grants from infrastructure funding pots, working their political connections to be the “lucky” recipient. This contributed to today’s perfect storm deteriorating patchwork of physical and social infrastructure, ever scarcer and debilitated natural resources, growing community demands for quality of life attributes, and a wave of natural calamities that have actualized the risks and effects of climate change. This is occurring just when municipal and state/provincial governments are woefully under-resourced to directly fund renewal capital. The few formula funding pots have either disappeared or have become increasingly difficult to access and new merit funding opportunities such as the $4.18B TIGER Grant Program generated thousands of applications resulting in more than $50B in demand. At this critical juncture when shortcomings in infrastructure could leave them in significant jeopardy, the traditional sources of public funding are wholly inadequate and cash-strapped communities, counties or regions must now compete globally in a nearly desperate race to attract and out-compete their cousins for impact capital.
In this heightened competitive environment, the problems will be large if cities and regions fail to make the changes needed to solve their infrastructure deficits in new ways. Recognizing that the old approach can’t work, a new perspective, often encapsulated under the header of integrated sustainable infrastructure systems, is the emerging alternative, premised on view that the ‘triple bottom line’ of economics, environment and social benefits combine to be the real value proposition. In the past few years there has been impressive progress in this sphere of sustainable and systemic planning and design across the range of civil infrastructure. The most recent and compelling step forward is being shaped by the Envision™ Sustainable Infrastructure framework, rating system and economic companion tool created and implemented by the Institute of Sustainable Infrastructure and its industry-supported think tank, which operates at the Zofnass Program at the Harvard Graduate School of Design (www.sustainableinfrastructure.org). Despite a compelling business case born of lifecycle value the challenging obstacle is still in the sphere ‘of how to fund it’ particularly if we recognize that a major contributor must be private impact capital.
This raises the question, “how attractive is public infrastructure” as a destination for impact and other forms of private capital? On the one hand, public infrastructure, if properly managed and maintained, offers a stable and visible long-term asset with a steady user base and well-known, potentially growing, inflation protectable revenue streams. But these attributes are counter balanced by obstacles. Most of the so-called impact capital market is in the hands or strongly influenced by institutional investors that include large pension funds, environmental, social and governance (ESG), socially responsible investor (SRI) and single family office (SFO) funds, consultants and trustees. These impact investors are seeking opportunities within the $53 trillion global infrastructure sector for the $26 trillion in capital they control and many have a hunger to place capital in public infrastructure. But the relatively small project size, long lead time, political risk and due diligence costs associated with these projects are keeping them away. In simple terms, they have struggled with quantifying the value and risk associated with specific projects. In addition, they have found the average project size well under the dollar amount needed to efficiently finance in the marketplace. Large constructor-operators able to participate in public private partnerships (P3) are also looking for opportunities that can meet their risk profiles and need for scale. Additionally, some elected officials, economists and labor leaders have opposed pension investments in infrastructure due to their perception of the unwise use of privatization with resulting job losses and negative community impacts.
The emergence of more holistic “triple bottom line” and “sustainable return on investment” analytic tools also challenge planning and design teams to create solutions that deliver for maximum social, environmental and economic impact. Business cases can guide designers to outcomes that deliver the greatest overall “bang” for the buck over project lifecycles while simultaneously helping to identify the interests of project stakeholders. Stakeholder interventions can often be the greatest immediate risk to project development – scheduling and permitting delay and construction inflation. By clarifying stakeholder objectives in risk-adjusted monetary units, project sponsors can more easily position and negotiate their initiatives for success thereby reducing the due diligence burden.
The development of these analytic tools promise to transform the way that projects are developed, vetted and positioned for financing. These consistent frameworks will challenge sponsors to make a transparent case for funding, as investors realize that much of the value they seek exists but has heretofore not been accessible. By revealing answers to some of the questions posed in this approach, and by challenging all proponents, designers and financiers to look more closely, it will not be long before vetting based on transparent and objective business cases becomes standard practice.
One tangible piece of the solution to this puzzle is regional thinking. As described, single standalone projects are rarely actually standalone. Taking a bigger view can lead to bundling projects that can be synchronized, compared and linked to distribute risk and create suitably sized financing packages better matched to impact investors’ or P3 requirements. These regionally based packages can meet other criteria that can lead to impact capital participation, primarily by the identification of trade-offs that can increase the return on investment to investors. Other benefits of regionalized systemic planning can include shortened overall schedules (from systemic plans and processes, and anticipation-response to stakeholder interests), political support (attracted to larger, geographically broad and potentially multi-jurisdictional initiatives) and a willingness to do what is needed to reduce the cost of due diligence so that P3 proponents can more easily participate. There are already examples, such as the current project to replace New York – New Jersey’s Tappan Zee Bridge where regionally based, holistic business case approaches have already contributed to expedited development, delivery and partnerships valued at nearly $4 billion.
These progressive approaches can enhance infrastructure projects as attractive investments for impact capital. Project sponsors who understand and articulate the full value and risk associated with their projects will realize an advantage in the competition for merit funding and impact capital. Over time, as comprehensive business cases become more common, users will realize additional benefits as projects are regionally bundled and systems are managed on a basis of value for money, defining opportunities that deliver reasonable returns at reasonable risk as compared to other investment options. Infrastructure projects can provide long-term predicable returns, inflation protection, and positive social and environmental impact. With these factors rapidly emerging, the stage is set for the new sources of private impact capital to step up and fill a role formerly played exclusively by public funding sources.
As to whether this proposition is worth taking seriously, I can only share what I am seeing and discussing with my colleagues at Stantec and with others in the industry and academic circles. My Stantec colleagues and I exist in the realm of serious and long-term designers and planners used to working on variety of infrastructure projects from inception through planning, development and delivery. We see our profession and our clients changing in response to powerful forces and believe our industry can be shapers rather than followers within an inevitably altered future. We recognize the need and benefit of working closely with the finance and banking community to achieve our mutual goals.