infrastructure revealed (Photo credit: nicolasnova)
This country has an infrastructure crisis. A lot of my blog talks about the need for building fiber since I consider fiber as basic infrastructure in the same way that roads, bridges and sewers are infrastructure. Any town without adequate fiber is already starting to get bypassed in terms of opportunities for its citizens and businesses. And this is only going to get worse with the upcoming Internet of Anything, because only fiber is capable of carrying the vast amounts of data that are going to be generated.
But this country has a crisis with every kind of basic infrastructure. We are not spending enough money to keep our roads, bridges, power, water and other basic infrastructure from slowly deteriorating. The backlog of infrastructure upgrades needed just to get the country back to adequate is staggering.
It has historically been the purview of government to take care of a lot of this infrastructure – and while the federal government takes care of interstate highways and some bridges, the obligation for keeping up with infrastructure falls largely on state and local governments.
And those government entities do not have anywhere near the borrowing capacity to begin tackling the cost of fixing everything that needs fixing or updated. And local property and other taxes would have to be increased a huge amount to pay for it all. Even if there was a taste for doing the needed upgrades, the recent economy has brought many local governments up against their borrowing limits. And we are starting to see municipal bankruptcies, small and large, which is a sign that the municipal borrowing system is cracking around the edges.
And the ability for municipal entities to borrow could get much harder. The recent Detroit bankruptcy is just the tip of the iceberg in terms of large cities that are buckling under accumulated pension costs. And the nonsense going on in nonsense going on in nonsense going on in Washington with the federal debt ceiling might drive up interest rates.
Given all of these factors one has to ask if government financing is the best way to build infrastructure. There certainly are mountains of evidence that municipally funded projects cost more than similar projects constructed by private firms. And while municipal bond interest rates sound cheap, bond money is extremely expensive money due to the additives to bond borrowing such as capitalized interest and debt service reserve funds.
If this country has any hope of putting a dent in the huge infrastructure hole we find ourselves it is going to have to come from bringing private capital to bear on the problem. Where there is a financial crush in the public sector today we are looking at huge amount of private equity on the sidelines today just waiting to be invested in good projects.
The trick to attracting private money for infrastructure is to find a good way to forge public / private partnerships. Unfortunately, there is one key missing component that is making it hard to bring private money into infrastructure deals. And that is development capital.
Development capital is the money that is spent up front in a project to take it from concept to working plan. This includes such things as creating business plans, doing basic engineering, identifying hurdles and solutions – all of those early steps that private equity expects to be done before they will consider a project. In layman’s terms, private equity investors expect somebody else to have done the legwork to prove the feasibility of a project before they will consider it.
We have a development capital gap in this country. There are very few entities today that are willing to tackle spending the development capital needed to prove infrastructure projects. And so hundreds, even thousands of worthy projects are going undone because nobody is willing to spend that first 1% of a project needed to get it started.
What we need is a person or a group of people to step up to provide development capital. This could be government. For instance, for the cost of building one bridge they could instead provide the public development capital to build one hundred bridges. So state governments might be a great place to get this done.
It could also be done privately, meaning that somebody needs to create funds that strictly are development capital. Such funds could produce fantastic returns. But this is a concept that is alien to US investors.
But somebody needs to figure out how we get development capital or our infrastructure is going to continue to deteriorate until we have no choice but to fix it directly with tax dollars.
I believe the fundamental problem here is one that spills over into all aspects of our national political scene…polarization. Unfortunately most believe that its an either/or situation…its either the government or the private sector. You hit the nail on the head with the assertion that we need better public/private partnerships, but what’s the mechanism to facilitate such partnerships or to assure private equity of a return?
I can understand how the use of public development capital could entice private equity to invest in fiber infrastructure or even municipal water systems, but where is the return on a bridge or road? Just imagine the hand ringing that would take place if suddenly hundreds of new bridges and roads were converted to toll models. Even if you could make a case for a government guarantee of ROI for the building and maintenance of these projects without charging tolls, private equity is still going to be hesitant to invest after witnessing what has happened in the telecom industry over the past few years. Everything moves along nicely until congress decides that you’re making too much money off of these roads and bridges and votes to cut your return in half. Unfortunately, at that point, you are stuck owning them and the maintenance that goes along with them.
I think that fundamentally, our government is entirely too volatile an investment for private equity firms to be comfortable with. Its not even political in terms of right or left, but the fact that its so polarized that no one can safely predict what direction we are going to go.
I would disagree that the volatility of government at the federal level has any negative impact on investing in local government, which is where most infrastructure is paid for today. These things are paid for with municipal bonds, and those bonds are bought by commercial buyers. These same buyers would back the same projects financed a different way.
And you are probably right about toll roads and toll bridges, although a toll bridge beats the heck out of a bridge that is so old that its going to fall down. But there are countless infrastructure projects that come with a revenue stream such as water and sewer systems. The same revenues that are used to pay for them through bond financing could be used to pay for them through a public private partnership. And the good news is that the PPP investment would be done for less money, meaning that it would be easier to pay for.
The model I am talking about has been used a lot in the rest of the world. For example, Turkey has much better infrastructure today than the US and it was paid for largely through the PPP structure I am suggesting. But this country went a different way in the past and took the path that everything should be done with municipal bonds and tax dollars. The problem with that is that people already think their taxes are too high and will not allow local government to borrow the trillions needed to fix all of the crappy infrastructure in the country. Out system is broken and municipal bonding is not going to fix it. We either find a different way to pay for all of this or we are going to watch our infrastructure rot beneath us.