Compared to the rest of the world, the United States has limited private investment in infrastructure. This stems in part from our historical reliance on subsidized tax-exempt financing such as municipal bond financing and state revolving loan programs. But as need outstrips the capacity of traditional funding sources, we must look for new models. And we don’t have a choice: To stay competitive in the global economy, the United States must have thriving energy, transportation, and utility systems.
California, Oregon, Washington State, and the Province of British Columbia have formed a nonprofit entity to explore alternative funding and delivery methods designed to generate $1 trillion for such needs over three decades. The West Coast Infrastructure Exchange (WCX) aims to facilitate relationships between stakeholders who share the same goal but work under different mandates, timelines, and statutory constraints. Bundling projects within the states and improving procurement regionwide will save money that can be used to finance projects that otherwise wouldn’t be possible for resource-strapped cities, counties, and special districts.
“There is no ‘free money fairy,’” says Oregon State Treasurer Ted Wheeler, whose department is overseeing an interim management team comprised of representatives from each partner office. “The WCX aims to fill both the expertise gap in local governments and the relationship gap between government and private investors. It’s about accountability and using private-sector expertise to make public projects possible. We’ll still need to pay for these projects and the tab is massive and only getting bigger. But we can help governments stretch dollars further.”
Target investment opportunities include energy transmission and efficiency, water storage capacity, municipal water systems, and wastewater management.
Ideally, other regions in North America will be able to replicate the models the coalition deploys.
“Value for money” framework
In 2012, the WCX completed a strategic plan that identifies key priorities identified during the planning process:
Developing an investment-evaluation framework with a “value for money” analysis that includes all relevant costs, including risk transfer, of traditional vs. innovative finance and delivery
Developing an investable project database
Developing a program for research, technical assistance, and information exchange to support local agencies interested in spearheading initial projects
Identifying gaps and obstacles, and strategies for addressing them
Conducting business case evaluations for an initial round of projects
Connecting “early win” project opportunities with private capital.
During a planning workshop that included the four partners and potential investors like California pension funds, there was a lively dialogue regarding formats that might help bridge the expectations gap between municipal agencies (for example, regarding interest rates) and private funders
If, for example, investors accept a lower return than the typical 10% to 12%, the WCX could broker deals between those willing to accept mid-range returns and project owners. A rigorous preliminary screening framework would identify investable projects as well as those that could be bundled to achieve a scale that would attract investors.
Initial costs plus O&M
Still in the formative stage, WCX is in the process of hiring a full-time exchange manager. The application deadline was in mid-January, and the hope is to have chosen someone by mid-February.
As of press time, there were no formal investment commitments, but local jurisdictions are already submitting potential projects and technical-assistance requests. While it’s too soon to say which ones will be deemed appropriate, one thing is for sure: Local governments that struggle to plan, finance, manage, and maintain infrastructure will be able to move forward without relying solely or mostly on the municipal bond market. For the right projects this approach can stretch taxpayer investments, keep infrastructure public, and effectively engage private-sector expertise and capital.
The plan is to start small with pilot projects to lay the foundation for applying a model to larger, more complex projects. The exchange manager will guide the process in concert with committees.
Also, project life-cycle analysis will include operating as well as capital costs. The owner may enter into a performance-based contract for maintenance with a private contractor and essentially make “mortgage” payments. If the contractor doesn’t deliver as promised, the company doesn’t get paid. This protects the taxpayer from the classic 99-year lease and produces better-maintained infrastructure. For the right projects the approach can stretch taxpayer investments, keep infrastructure public, and effectively engage private-sector expertise and capital.
The WCX is not going to sell public infrastructure to private investors. An asset sale could be a component of some deals, but much more likely types of deals would be financing-only or a public-private partnership, such as long-term concession with an operations piece, that falls just short of an outright sale.
“When there are opportunities for the private sector and the public sector to work together on a project of significance, we would explore them,” says Wheeler. “In those cases, it’s important that the public sector do what it does well, such as regulations and setting standards; and that the private sector do what it does well, such as project management and on-time delivery.”
— Knowles is area office manager for CH2M Hill in Portland, Ore.; Matichich is the firm’s practice area lead for financial services; Wilson serves as a project development leader for the firm in North America. All three were key contributors to a recently completed strategic plan for the West Coast Infrastructure Exchange (WCX).