Innovative Financing & The Myth of the Shovel-Ready Project

Content originally written for and posted on Meeting of the Minds.

With every new Administration in Washington there are always sweeping promises about improving the nation’s infrastructure. Since the last recession, these promises have become inextricably linked with talk about mobilizing private finance.

In 2009, after the immediate impacts of the recession abated, it was clear that cities, dependent on tax income, were going to be cash strapped for years to come. Which means while our infrastructure was getting worse, the money to fix it or upgrade it was getting harder and harder to find. This jumpstarted a national conversation—led by pension funds, environmental and social responsibility divisions at big banks, and impact investors—about how private capital could fill the public financing gap through instruments like P3s, Green Bonds, Social Impact Bonds. While there have been a handful of one-off examples and exciting new models, nearly a decade of talk about financing has not translated into substantially larger or speedier private investments in infrastructure.

Why? Because the mantra “if you build it, they will come” unfortunately doesn’t translate to infrastructure. More often, if you built it right, no one will notice.

The highest value infrastructure investments for cities today are those that help clear the massive backlog of deferred maintenance projects, but the greatest value for investors are new greenfield projects that lock-in long-term revenue streams. This mismatch is most evident in the lack of a clear pipeline of financeable infrastructure projects.

Innovative financing doesn’t magically create new projects, let alone a whole pipeline of shovel-ready financeable projects. To understand why, let’s look at a few of the sexier financing tools which get a lot of air time.


Green Bonds
: Green Bonds, like other municipal debt, are tax-exempt issuances specifically earmarked for funding projects, assets, or business activities that have positive environmental and/or climate benefits. In 2016, issuances topped USD 50 billion by September (nearly 5x the 2013 issuances supporting everything from brownfield development, to transportation and energy projects). In addition, the number of corporations issuing green bonds has grown significantly in recent years, but most have been used to support corporate finance rather than project finance.

Social Impact Bonds: A Social impact bond (aka Pay for Success Financing or Social Benefit Bond), is tax-exempt municipal debt structured as a contract between private financiers, often philanthropies, and a public-sector agency. Funds are provided to pay for improved social outcomes that result in public sector savings. Investors are only repaid if and when improved social outcomes are achieved.

Payment for Ecosystem Services: PES contracts are most often structured as legal agreements whereby a user of an ecosystem service makes a payment to an individual or community whose practices, like land use or deforestation, directly affects the value of that ecosystem services.  Because payments are based on the quantity of services provided, ecosystem service programs must concretely measure the ecosystem benefits generated, which can be a difficult task. These schemes work best when private companies, public-sector agencies, and non-profit organizations collaborate, and have most often been used internationally to support corporate social responsibility agendas.

All three of these innovative finance tools have one thing in common: each one requires projects that are already designed, quantified, and valued. This means that public entities have had to invest up-front in designing a project to generate savings that can be attributed to a specific entity. Therefore, a city must have collected significant baseline data upfront, made sure that they can measure changes in that data across the lifetime of the investment, and committed that they have the capacity to capture those savings as payment commitments under contractual agreements. All of which can be a burden for big cities, let alone many of the small and midsize or rural communities across the country that are often both cash- and data-poor.

In all of these cases the biggest barrier to expanding innovative finance for infrastructure is the lack of funding available to design and develop strong infrastructure project proposals, not to build them. So, what can we, do to hasten the development of the project pipeline?  The first step is making it easier for cities to design new and innovative projects that tackle real problems, like upgrading aging and failing combined sewer systems, not just creating ribbon cutting opportunities.

Often being innovative for a city means being the second or third to do something. So, making sure successful projects are searchable and replicable is key.  The Atlas Marketplace has started to do that by capturing information about the people, policies, financing schemes, and procurement documents that got projects built.

The second step is improving project predevelopment starting at the ideation and design phase. Instead of relying solely on long-term capital improvement plans that respond to historic needs, cities should work to identify cross-sector opportunities that can create savings that up new opportunities. Like laying rentable dark fiber every time a road is repaved, or upgrading water infrastructure to reduce the costs of mudslides. This works best when cities engage early with financiers and engineers to unearth opportunities by issuing challenges or broad requests for ideas.

Finally, building local capacity is essential. There is a big difference between the type of data that governments need to support investment and the type of data private financiers need to support investment. Being clear about that and not conflating the two will go a long way in closing the gap between projects and money.

While it’s fun to talk about innovative financing, it’s time we change the conversation. Moving forward let’s focus on building a pipeline of innovative projects that opens the door for private financing. Because if we build it to make money, the private investors will most definitely come.