WASHINGTON (May 15, 2013) - State and local governments in the U.S. are leading the way in delivering infrastructure projects against a backdrop of budget constraints and an ongoing lack of consensus about future investments by the federal government, according to Infrastructure 2013: Global Priorities, Global Insights, a joint report from the Urban Land Institute (ULI) and Ernst & Young.
The report points out that state and local governments account for approximately 75 percent of all infrastructure spending, with the remainder supplied by the federal government. However despite this expenditure, infrastructure spending as a percentage of GDP has shrunk to only 2.4 percent from its peak of more than 3 percent during the 1960s.
With uncertain federal support, state and local governments are advocating local tax rises and higher user fees and tolls to pay for key infrastructure investments. Governors and mayors, notes the report, are promoting these initiatives to their constituents by emphasizing the benefits of infrastructure projects as employment opportunities and as an economic stimulus.
“Many local government officials recognize the strategic need to plan for future requirements,” said ULI Chief Executive Officer Patrick L. Phillips. “With the extent of federal support uncertain, many of these officials are taking action for themselves, often pioneering innovative funding models.”
Howard Roth, Ernst & Young’s Global Real Estate Leader, added, “The U.S. has a continuing substantial need to upgrade its infrastructure to keep up with global competitors. There is a clear and powerful linkage between investments in infrastructure and the future growth, real estate development and vibrancy of cities and regions. Capitalizing on these connections requires public leadership and investment as well as private initiative and capital.”
Mike Parker, Infrastructure Advisory leader for the Americas Area of the Ernst & Young organization, and Senior Managing Director of Ernst & Young Infrastructure Advisors LLC, commented, “Well-conceived infrastructure is a foundation for growth and a higher quality of life in any city or community. We are encouraged by the growing recognition by leaders in both the public and private spheres of the importance of infrastructure investment. We are seeing renewed efforts to accelerate needed projects, make hard decisions and bring creativity, foresight and sound economic stewardship to critical infrastructure development."
State and local officials often must overcome skepticism that expenditures on infrastructure will provide appropriate value for tax payers and system users or that the projects can be delivered on-time and on-budget. To that end, some state and local governments are experimenting successfully with design-build construction and public-private partnerships (PPP) which include turnkey delivery, long term performance responsibilities and financing for new infrastructure projects and maintenance.
Interviewees in this year’s report see a large pipeline of potential deals developing but are mindful of the need to demonstrate good value and not unduly impair flexibility to meet changing needs in the future. In addition, in sectors where there are not targeted federal credit programs, the disparity between private and federally tax-exempt costs of capital requires a more compelling greater justification for undertaking public private partnerships than in other countries which do not have tax-exempt public financing options. In the US, the cost of borrowing for all levels of government remains near record lows. Access to capital is constrained by future funding projections rather than capital markets.
A significant number of pension funds and global investors have an unmet demand for domestic, taxable infrastructure investment opportunities. However, many institutional investors remain cautious about investing in infrastructure at the development phase, struggling to project investment performance based solely on revenue forecasts or to accept construction risk. There is governmental interest in projects that combine infrastructure and real estate development, but investors generally perceive these as two separate markets. There is strong institutional investor interest for completed infrastructure projects which are well into construction and pose limited revenue risk. TIAA-CREF and several large public pension plan sponsors such as the California Public Employees Retirement System are leading the way in investing in infrastructure and more are expected to follow as an increasing number of fund managers and certain types of projects demonstrate solid investor returns.
More states and cities, like Chicago, are considering establishing infrastructure banks to enable more creative financing of local projects. However, these business models remain in development as they work to address governance and tax-exempt finance complications. Ultimately, financing alone will not address structural needs for greater and more predictable long-term funding mechanisms.
Many cities and regions find they can achieve more by pooling resources. In a promising initiative for regional cooperation along the Pacific Coast, California, Oregon, and Washington have joined forces with British Columbia in Canada to explore funding strategies for upwards of $1 trillion in shared infrastructure projects to promote growth over the next three decades.