Six local banks in Kentucky banded together to create a $150 million investment fund to support public private partnerships. The fund is called the Commonwealth Infrastructure Fund and is intended to provide debt financing to state and local PPP initiatives in the state.
You might not think this is newsworthy, but it is for several reasons. It’s one of only a handful of examples of bank debt being clearly earmarked for infrastructure investing. In this country virtually all debt for projects that involve the government is financed with municipal bonds. But this wasn’t always the case. While municipal bonds, or their equivalent, have been around for centuries, as recently as fifty years ago banks also played a big role in lending to municipal projects.
But for various reasons banks backed out of infrastructure investing. First, banks have backed away over the years from lending into long-term projects. Municipal projects are often of long duration and it’s not unusual to see infrastructure projects financed over 20 – 30 years. That’s a long time for a bank to tie up money and it also carries the risk of lending into future higher interest rates.
There have also been some spectacular failures with municipal bond defaults in places like New York City and Detroit. While the risk of lending to commercial businesses is a lot higher, the municipal defaults have added risk to lending to municipal-based projects. However, to offset this, the collateral on municipal loans can be extremely safe, particularly if default on a loan is backed by tax revenues.
It’s important to note that this particular fund is looking specifically at public private partnerships. That is a venture that that benefits the government but is backed to some degree by private capital. PPPs come in many flavors. At one end of the spectrum are projects that are all private money, such as some recent projects where a commercial company built new schools and then leased them back to the government. At the other end of the spectrum are PPP projects where the government mostly finances but a private firm largely operates the venture. A good example of this is the fiber network in Huntsville, AL where the city built the project and Google Fiber operates the business.
This fund is something that the country really needs. I’ve seen estimates that there are somewhere between $4 – $6 trillion of needed infrastructure improvements in the country. This ranges from deteriorating roads, crumbling overpasses and bridges, old government buildings, outdated schools, old dams and water projects, etc. But currently there is already over $3.7 trillion in outstanding municipal bond debt. The cities and states can’t begin to take on all of the additional debt needed to bring our infrastructure up to snuff. So we need private money to enter the picture and to help pay for projects where that makes sense.
Anybody lending into PPPs understands the relatively low returns from infrastructure investing. Municipal bonds today generally pay interest rates of 2% to 5%. A lot of private money has been chasing the higher returns of technology investing, but there are still plenty of sources of money like pension funds that are happy with long-term stable and predictable returns. All of the financiers I know say that they are seeing a renewed interest in long-term safe returns.
This Kentucky fund would be a perfect place to look for help with fiber projects. Kentucky is one of the states that still has huge amounts of its geography with poor or non-existing broadband. I would be surprised if the telcos in the state don’t show interest in the fund, assuming the fund would be interested in them.
Raising $150 million for infrastructure lending is only a drop in the bucket when looking at the big picture. But it’s a start and hopefully this will lure other banks and sources of debt and equity to give more consideration to infrastructure funding.