Seeking infrastructure: Financing challenges by Champoux

Barbara Champoux, Champoux Law Group

As discussed in the preceding “Seeking Infrastructure” series article (https://cre.nyrej.com/seeking-infrastructure-social-overview-barbara-champoux/), without a solution for enabling and accelerating “social infrastructure” projects, neither the U.S., nor any other nation, can provide its citizens with adequate healthcare, education and training, and access to resources, which are critical to ensure future generations a successful strong future.

Yet, infrastructure investment is lagging, despite sufficient long-term finance being potentially available, and resulting long-term economic growth. If improved infrastructure’s benefits are so obvious, and financing is available, why are so few infrastructure projects being successfully implemented?

Overcoming this infrastructure bottleneck is necessary to avoid the large economic and social costs of failing to provide access to such resources. Given the economic limitations on the federal and state governments, the growing demand for infrastructure investment will need to come from the private sector. Since banks, a predominant financing source, have mostly short-term liabilities and want to avoid holding long-term assets on their balance sheets, this will require new, and much broader, finance sources and instruments.

With abundant funds in world markets and very low long-term interest rates, there is ample long-term financing available from other private sector sources. Pension funds, insurance companies, and other long-term institutional investors with large and growing long-term liabilities, need long-term assets. Yet, only a small percentage of their resources is currently allocated to infrastructure, and the international capital markets are largely untapped.

A major reason for this disconnect appears to be the lack of a properly structured investable project pipeline for investors.

Infrastructure assets are different from other asset classes in several ways, particularly the heterogeneity in the setup of projects and the lack of readily available data, making it more difficult to develop expertise and efficiently comparatively assess numerous infrastructure projects. Across countries, and within any given country, infrastructure projects often have completely different contractual structures and regulatory frameworks (e.g., building permits, environmental requirements, etc.). Long-term investors must recognize infrastructure as an attractive asset class, with distinct properties that can help optimize the risk and return profiles of their portfolios, in order to build a project pipeline.

Furthermore, infrastructure investments entail complex legal and financial arrangements, requiring a coherent and trusted legal framework, and stakeholders with substantial expertise. Without a predictable pipeline of investable projects, the fixed costs of developing these arrangements, and building up this expertise, are often too high for potential investors. If contracts are designed properly, such that the risks and returns are distributed in an incentive-compatible way, private investors also have an incentive to see that an infrastructure project is executed efficiently – because it increases the likelihood that their investment is safe and as profitable as expected.

The promotion of private sector infrastructure finance hinges above all on a sensible transfer of risks and returns. If done properly, the involvement of the private sector can lift efficiency – it should not be seen merely as a source of financing – and governments must make concerted efforts to ensure that transfer and overcome their hurdles.

Barbara Champoux, Esq., is a board member and past president of the CREW New York Network, New York, N.Y.