With the uncertainty of long-term federal funding there is renewed emphasis on finding other ways forward. Some still opine that increasing taxes on the “top 2 percent” will produce enough revenues to balance the budget and fund critical infrastructure. It is not the intent of this article to make a political statement about the pros and cons of such a plan. But taxing all the income from the top 2 percent to feed a federal budget, that spends nearly $10 billion a day, would run the government for less than a month. This, in itself, is not a feasible plan.
Some hope the private sector will fund infrastructure. There are instances of this happening on a small scale and larger projects are being considered. The challenge is that the rate of return on such projects may not attain the goals of investors.
Others tout public-private partnerships, also known as P3s. There have been successes, but primarily on a smaller scale (projects of several billion or less). A significant concern arises with P3s when the public sector, due to an inadequate contribution, is not an equal partner. Nonetheless, there is tremendous upside potential for well-designed, synergistic P3s that could move megaprojects forward.
Another avenue that is starting to gain traction is value capture financing. On first blush it appears to be a relatively straightforward proposition. It has been proven that land located near newly built infrastructure appreciates in value. Any development on that land will likewise be worth more. This is especially true if the new infrastructure is transportation related. The appreciated private asset is now able to generate more revenue for its owner. The principal behind value capture is that some of this additional private revenue can be “captured” or harvested to pay for the capital costs, and in some instances, subsidize the operating and maintenance expenses of the new infrastructure.
Value Capture Mechanism
The government entity cannot negotiate empty handed. In most instances, especially with projects for which no infrastructure is yet in place, it is necessary to kick-start the process by bringing something of value to the table. This could be in the form of dedicated tax revenues, land grants, zoning variances, etc.
In simplest terms, an infrastructure development project consists of three distinct phases. Phase 1 is the initial phase — proposals are fleshed out, initial design work commences and permitting/approvals are granted. A quasi-independent joint powers authority (JPA) may be established to run the project. At this point thegovernment entity must be well on its way in identifying funding sources. Key areas for funding are dedicated sales taxes, land grants and federal/state grants. The funding can be city/local, county/regional, state, or federal, or some combination of all four. These commitments are required by the underwriters that will float the bonds for construction. The underwriters might also require that a government entity guarantee interest payments should the revenue projections come up short. There is limited opportunity for revenue from private developers, mainly in the form of transferable development rights, which are essentially easements or zoning variances.
Phase 2 is the construction and development stage. This stage is very capital intensive. The bonds are floated to provide the cash necessary for construction. The JPA needs to be generating sufficient income to pay the interest coupons on the bonds, as most underwriter covenants prevent the use of bond capital to make interest payments. Phase 2 offers few opportunities for revenues from private developers.
The last stage is Phase 3 when the fruits of both the infrastructure construction and private development start to come on line. The JPA can start collecting passenger facility charges from direct users of the transportation infrastructure, and special assessments or payments in lieu of taxes from the private developers. For existing properties in the infrastructure development envelope, special business improvement districts can be established to funnel a tax-like assessment to the JPA for their appreciated value.